Risk & Economy » Audit » Special audit – Finders keepers.

The market for accounts payable audit and recovery services, and the range of suppliers competing within it, is far less well developed in Europe than in the US. However, one of the major US players, the Profit Recovery Group (PRG), has been operating in the UK for four years and now claims over 40% of the FTSE-100 as clients.

PRG’s hold on the UK market is set to strengthen further, as the group is currently in the process of acquiring Howard Schultz & Associates (HAS), its largest US and UK competitor. The main difference between the two is that HAS is more focused on serving retailers, wholesalers and distributors, whereas PRG has a more general commercial focus, including manufacturing, high-tech and healthcare.

Last year PRG recovered in excess of $1bn for its clients globally. “In the UK alone we recovered Pounds 50m for our clients, and our average recoveries in the UK are in the mid-six-figures,” says Kelvin Thompson, managing director of PRG UK. Thompson, a US accountant by training, became involved in accounts payable audit 10 years ago with Loder Drew & Associates, a company since snapped up by PRG in an earlier acquisition spree.

The accounts payable mistakes that form PRG’s bread and butter result from simple processing errors, such as duplicate payments, overpayments, payments to the wrong suppliers, missed discounts or credit notes that haven’t been processed. They would ordinarily go unnoticed because they fall outside the scope of either internal or external auditors’ work.

For example, for one UK client PRG audited a million transactions that took place over a three-year period, with a total spend of Pounds 3.3bn. PRG found 165 errors that had cost the company Pounds 700,000. “That 165 out of one million is immaterial,” he says. “The Pounds 700,000 out of Pounds 3.3bn is also immaterial. So the internal or external auditors would pass them.”

Although such error levels are beyond the interest of external auditors’ year-end work, Thompson says the Big Five are starting to offer services in this arena. However, he isn’t impressed by their offerings, arguing that audit firms don’t have the dedicated expertise, or the specialist software, to do the job.

PRG is able to do what it does because it has developed its own sophisticated software and has the advantage of specialisation on its side. “As a global company, we are doing anywhere from 800 to 1,000 of these audits a year,” Thompson says. “We know what to look for because we do this for a living.”

Some of the recoveries can be highly significant. One recent discovery, in the process of being recovered, was a Pounds 3.1m overpayment to the Inland Revenue. “We find a lot with VAT payments too,” he adds. However, most recoveries are far smaller, since these receive less attention when being approved for payment.

PRG’s business is a numbers game: the more transactions processed, the more errors there will be. In addition, the more people involved in processing a transaction, and the more changes made to an organisation’s software, the greater PRG’s expectation of finding errors. “The criteria we use are that organisations should have 200,000 transactions over a three-year period, with at least six people processing accounts payable,” Thompson explains. However, companies falling below these targets may be of interest if there is good reason to expect mistakes. For example, the hi-tech industry is highly attractive to PRG because companies in it tend to grow rapidly.

Before starting any audit, PRG asks its client to supply two files of key data: firstly, an accounts payable or paid invoice file for every payment made over a given period, containing each supplier’s number, name, invoice number and date; and secondly, a supplier master file, containing every supplier’s details.

PRG uses this data to perform its analysis and identify potential processing errors, researching into the cause of each error to determine whether the client is due a refund. Once PRG has obtained clearance from the client, the PRG auditor sets about contacting the supplier, explaining the apparent error and asking for a response. Once the supplier agrees to the error, PRG asks for a refund cheque or, where the client owes the supplier outstanding sums, a credit note with an authorisation.

PRG charges its fees on a contingency basis. “No recovery, no fee,” says Thompson. Cheques must clear and credit notes be processed before the firm takes its cut, usually 50% in the UK. Potential clients may initially balk at the rate, but most of the recoveries relate to items long since written off the books, potentially dating back up to five years. However, in the US, where competition is fiercer, the work can be done for a 30% take.

While the thought of recovering cash may attract the FD’s eye, PRG sells itself as providing more than just an overpayment recovery service. “Our number one goal is to help clients lower their cost and raise their operating efficiency in the area of purchase ledger accounts payable,” explains Thompson. “We like to come in and perform a comprehensive review of procurement and disbursement. We identify any internal control weaknesses. If we can put a few quid on the bottom line, it’s a win-win situation for everybody.” PRG will also conduct a price, terms and conditions review to make sure that clients are not missing out on discounts they are due as a result of seasonal promotions, bulk discounts and the like.

The advisory side of PRG’s work is highlighted in client reports, based on its analysis of the client data. For example, it produces a disbursement analysis report (DAR), which analyses invoices and payments by month.

“We start looking for trends and benchmark how many invoices are processed per payment,” says Thompson. The information PRG provides highlights, for example, suppliers who send numerous invoices for small amounts, in which case the client could save processing time by simply asking that supplier to send a single monthly summary billing.

A supplier ranking is also produced, identifying suppliers that the client company hasn’t made any payments to in the last 18 months. It also highlights potential problems with the supplier master file data, such as suppliers with the same name but different supplier numbers, or suppliers with the same address – with or without the same name but definitely with different supplier numbers. Such master file mistakes or duplications increase the likelihood of accounts payable processing errors. “There is no software in the world that will cross over a supplier boundary in looking for a duplicate payment or processing error,” Thompson says.

At the end of the audit, PRG provides a narrative audit report (NAR) detailing, for each error found, the internal control weakness that allowed it to happen, how it happened and remedial action to prevent it being repeated.

But if clients implement such recommendations, shouldn’t PRG find itself out of business after a few years? No, says Thompson, because companies continue to merge, acquire, change their software, change their personnel and systems. Next year he anticipates that 37% to 42% of PRG’s UK work will involve repeat business, most commonly involving a repeat audit around 18 months after the first. However, some clients have PRG personnel working for them almost continually. It depends on the volume of their accounts payable transactions and the changes they are going through.

Finally, fraud may be uncovered as a by-product of PRG’s work, though this is rare. Thompson knows of only three frauds found in his ten years in the business. However, PRG offers fraud advisory services and taps into the expertise of Frank Abagnale, one of the world’s most respected authorities on counterfeiting, and a former member of Loder Drew’s board.

Abagnale works with the FBI and lectures around the world. His input is particularly valuable, because he once operated on the wrong side of the law, as revealed in his autobiography Catch Me If You Can, which is being made into a film starring Leonardo diCaprio.

So what do clients think of accounts payable audit? Unfortunately, companies don’t like to broadcast the fact they use PRG’s services. However, one FTSE-100 customer said her expectations had been exceeded. “I was initially concerned that any organisation working on a contingency basis either would not have the staff to be able to make the recoveries, or would require a lot of support and be a drain on resources,” she says. “That really has not been the case. It was very professional. To have a company come in and find, what for us has been millions of pounds, is fantastic.”

The no recovery, no fee system is also a hit. “The contingency basis is fantastic, especially in a recession,” she says. “Every company is going through change programmes; everybody is looking at reducing headcount.

Things like statement audits, which aren’t a priority, fall to the bottom of the pile; but someone can come in and, for a percentage fee, do the lot.”