Lanza Praise for • How the cost recovery market works Cost …download.e-bookshelf.de/download/0000/5745/01/L-G-0000574501... · A ProfiT cenTer Cost ReCoveRy Turning Your Accoun

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Lanza

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Praise for

Cost ReCoveRy“Is your company leaking cash without even knowing it? Lanza’s easy-to-read book gives practical points on how to increase profits with little or no added cost. This is the corporate equivalent of finding money on the sidewalk; just reach down and pick it up!”

—Joseph T. Wells, CFE, CPA, founder and Chairman, Association of Certified Fraud Examiners

“Rich pours a great deal of his extensive knowledge into this guide. It is an encyclopedic approach to the hows and whys of cost recovery services. Not only does the reader learn about the basic mechanics of how cost recovery works, but also has access to numerous case studies showing how it works in key areas such as payables, advertising, health benefits, leasing, and telecommunications. The guide may prove to be the masterwork in this field.”

—Steven M. Bragg, CFO, Xedar Corporation

“An easy action reference tool on how reduced disbursements can increase income significantly more than an equivalent rise in sales. Your ROI on this book will exceed any other investment!”

—David H. Margulies, former Senior Managing Director at Bear Stearns, responsible for Controller’s Shared Services

“In an economy where revenue streams are constricted, using Cost Recovery techniques to find money or save money seems like an obvious strategy, but it’s perceived as a daunting task for most organizations. Rich Lanza’s Cost Recovery guide provides a step-by-step process that’s feasible to implement and easy to read.”

—Jacqueline A. Breslauer, SVP Corporate Audit, The CIT Group Inc.

“Rich Lanza, the ‘Data Magician,’ has elevated the art of data recovery audit and analysis to the next level. His passion for applying data analytics to the workplace has defined him as a pioneer in the area of cost recovery. I commend Rich for his thinking outside the box that has pushed organizations to review their approach to data recovery and cost control with the result of saving millions of dollars!”

—Jim Kaplan, CIA, CFE, President/CEO, AuditNet.org, The Global Resource for Auditors

CostReCoveRy

Turning Your AccounTs PAYAble

DePArTmenT inTo A ProfiT cenTer

Now every organization can generate cash recoveries, stop profit leaks, move away

from control issues, and work toward process improvements with the tools found in Cost Recovery: Turning Your Accounts Payable Depart-ment into a Profit Center. Authoritatively showing how to incorporate profit recovery technology to achieve stellar bottom-line results, this insightful and highly readable book provides step-by-step guidance for completing a cost recovery effort of any company’s spending.

Audit technology expert Richard Lanza clearly explains how to utilize free services offered by cost recovery consultants as well as how to assess risk based on the company’s control issues to identify the top areas of likelihood for recovery and process improvements. This important book looks at cost recovery from every angle, with in-depth coverage of areas including telecommunications, utilities, healthcare, advertising, media, freight, tax reduction, project fraud, and more.

Filled with illustrative case studies, Cost Recovery: Turning Your Accounts Payable Department into a Profit Center is a time-saving road map revealing:

• Why every company should consider recovery services

• How to overcome obstacles to implementation of cost recovery

• The opportunities—and risks—involved in recovery

ISBN: 978-0-470-32238-3

• How the cost recovery market works and which trends affect it

• How to select the best possible provider

• What the cost recovery auditor does

• The recovery technology used by firms to focus their testing efforts

The only book available to look holistically at the cost recovery process, Cost Recovery: Turning Your Accounts Payable Department into a Profit Center makes it easier for companies to better understand the nature of recovery firms and to start saving money . . . before it disappears.

RICHARD B. LANZA, CPA, CFE, PMP, is the President of Cash Recovery Partners, LLC, the author of twelve publications and, over 100 articles for major

audit and accounting publications. With nearly two decades of experience in audit technology and recovery auditing, he has become a leading authority in these areas. He also provides training courses in audit software and recovery, including forty-three speaking engagements in the last eighteen months. He has consulted on how to save money through the use of technology and recovery auditing for companies ranging in size from $30 million to $30 billion.

(Continued on back flap)

(Continued from front flap)

Chapter = Date: June 23, 2009 Time: 1:14 pm


Additional Praise forCost Recovery: Turning Your Accounts

Payable Department intoa Profit Center

“In these turbulent economic times, nothing is more important than pro-tecting your money. Rich Lanza shows you how to put proven theory intopractice. This book on cost recovery will save you time and money.”

—Dave CoderrePresident, CAATS

“Internal control professionals can glean practical insights on cost recoveryfrom Rich’s book and gain valuable insights into best internal control prac-tices. Industry, government, and education evaluators can convert vendorovercharges into cash: employee benefits, freight, leases, service agree-ments, and much more . . . Alas, a detective control that turns auditing intoa profit center!”

—Bob Benoit, President, Lord & BenoitSOX Compliance and Member of COSO Taskforce

“Cost Recovery: Turning Your Accounts Payable Department into a ProfitCenter is a valuable resource in any economic environment, industry, ororganization. Whether you’re part of a large, multinational corporation, ora relatively small company with one location, the broad range of topicscovered ensures that you will find something useful in this book.”

—Ronald T. AltomareDirector, Internal Audit and System’s Control

Barnes & Noble College Booksellers

“Cost Recovery: Turning Your Accounts Payable Department into a ProfitCenter is an interesting, accessible introduction to one of the most over-looked areas of corporate governance. Filled with real-life case studies andthe actual names of Recovery Firms from various and sometimes unexpectedindustries, the book reveals the power of not only recovering material fundsfrom historical transactions but reaping future cost savings from ‘closing thegaps’ as well. This is a must read for anyone involved in business planning,particularly procurement and internal audit.”

—James N. BeanPartner, Advertising Audit & Risk Management



Cost Recovery

Turning Your Accounts PayableDepartment into a Profit Center

RICHARD B. LANZA

John Wiley & Sons, Inc.


Copyright © 2009 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying,recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the1976 United States Copyright Act, without either the prior written permission of thePublisher, or authorization through payment of the appropriate per-copy fee to theCopyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923,978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to thePublisher for permission should be addressed to the Permissions Department, JohnWiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax201-748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used theirbest efforts in preparing this book, they make no representations or warranties withrespect to the accuracy or completeness of the contents of this book and specificallydisclaim any implied warranties of merchantability or fitness for a particular purpose. Nowarranty may be created or extended by sales representatives or written sales materials.The advice and strategies contained herein may not be suitable for your situation. Youshould consult with a professional where appropriate. Neither the publisher nor authorshall be liable for any loss of profit or any other commercial damages, including but notlimited to special, incidental, consequential, or other damages.

For general information on our other products and services, or technical support, pleasecontact our Customer Care Department within the United States at 800-762-2974, outsidethe United States at 317-572-3993 or fax 317-572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content thatappears in print may not be available in electronic books.

For more information about Wiley products, visit our web site at http://www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Lanza, Richard B.Cost recovery : turning your accounts payable department into a profit center /

Richard B. Lanza.p. cm.

Includes index.ISBN 978-0-470-32238-3 (cloth)

1. Cost centers (Accounting) I. Title.HF5686.C8L267 2009658.15 ′53—dc22 2009008540

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

Chapter = Date: July 2, 2009 Time: 5:20 pm

Contents

About the Author xiii

Foreword xv

Preface xvii

Acknowledgments xxi

How to Use This Book xxiii

CHAPTER 1 Benefits of Recovery Services 1

U.S. General Accounting Office Report “Recommends”Recovery Auditing 1

Top Benefits of Cost Recovery 2

Top Reasons for Recovery 4

Recovery Estimates—Embrace the Uncertainty 5

When Recovery Becomes Fraud 6

Sarbanes-Oxley Implications 9

CHAPTER 2 Overcoming Obstacles to Getting Recovery Started 15

Overcoming Obstacles to a “No Brainer” Service 15

Why Internal Audit Department Are Sometimes theWorst Resource for Doing Recovery Audits 19

Why Internal Audit Departments Are Truly the BestResource for Doing Recovery Audits 20

Why Select a Provider for Your First Audit 23

CHAPTER 3 Assessing Opportunities and Risk 25

Focusing on the Largest Fish 25

v


vi Contents

Scattergraphing: A Powerful Tool to IdentifyChanges in Company Activity 27

Going Deeper and Data Auditing Vendor Accounts 30

Using Vendor Toolsets 33

The Top 10 Questions to Ask When Deciding to Doa Recovery Audit 33

CHAPTER 4 The Overall Cost Recovery Marketplace 36

How the Industry Worked in the Past 36

Recovery Consulting Today 37

The Evolving and Continuous Recovery Processat Companies 38

Why Recovery Consulting Is so Popular 39

Dimensions of Recovery 41

Recovery Categories 44

How the Recovery Areas Are Definedin This Book 47

CHAPTER 5 Accounts Payable and Procurement 49

Case Study 5.1: American Auto Runs a Tight Ship 49

Case Study 5.2: Public Utility with Staffing Problems 51

Case Study 5.3: Contract Compliance with PinpointProfit Recovery Services, Inc. 53

Case Study 5.4: International Personal GoodsManufacturer with Retail Outlets 54

Case Study Wrap-Up 56

Recoveries to Find 58

Questions to Ask When Assessing the Opportunity 59

Conclusion 62

CHAPTER 6 Advertising Agency Audits and Media Reviews 63

Overview 63

Case Study 6.1: Reluctant Marketing Department HidingIts Intentional Agency Benefit 63

Case Study 6.2: Exit Audit after an Agency Transition 64


Contents vii

Case Study 6.3: Media Management 65

Case Study 6.4: Global Software Company 66



Prioritizing the Opportunity 73

Conclusion 74

CHAPTER 7 Audit Firm Benchmarking 76

Overview 76

Case Study 7.1: An Auditor in Trouble? 77

Case Study 7.2: Utility Service Firm Paying too Much 81



Questions to Ask 87

Conclusion 87

CHAPTER 8 Escheatment (Unclaimed Property) 88

Overview 88

Case Study 8.1: Accounts Receivable Overcrediting 92

Case Study 8.2: Pinpoint Profit Recovery Assists LargeServices Corporation 93

Case Study Wrap-Up and Recoveries to Find 96


Conclusion 100

CHAPTER 9 Freight Bill Auditing 101

Overview 101

Case Study 9.1: When Freight Classes andDescriptions Make a Difference 102

Case Study 9.2: Aluminum Manufacturer andDistributor Post-Audit 102



Questions to Ask 108

Conclusion 108


viii Contents

CHAPTER 10 Health Benefits Auditing 109

Overview 109

Case Study 10.1: Midwest Municipality Cuts Costs 111

Case Study 10.2: Employer Takes Control 114

Case Study 10.3: Holding Company Uses Comparisonto Advantage 116




Conclusion 123

CHAPTER 11 Lease Audits 124

Overview 124

Case Study 11.1: The Portfolio Assessment of aNational Consulting Firm 125

Case Study 11.2: Variety of Issues at a NationalBanking Corporation 126

Case Study 11.3: Park Avenue, New York City, withInappropriate Cleaning and Utility Costs 127

Case Study 11.4: Multinational Corporation AuditsOne Lease for Big Savings 129




Conclusion 135

CHAPTER 12 Order to Cash Reviews 136

Overview 136

Case Study 12.1: Construction Materials Not ReportingAll Cement Loads or Pricing Them Properly 136

Case Study 12.2: Too Many (Fraudulent) Fourth-Quarter Sales 138




Conclusion 148


Contents ix

CHAPTER 13 Payroll Tax Credits 150

Overview and Recoveries: Savings to Find 150

Other Federal Programs 153

State and Local Incentives and Credits 154


Conclusion 155

CHAPTER 14 Proactive Fraud Audits 156

Overview 156

Case Study 14.1: Association of Certified FraudExaminers Report to the Nation 158




Conclusion 175

CHAPTER 15 Project Fraud Audits 177

Overview 177

Case Study 15.1: California State WelfareAutomation Project 178



Questions to Ask to Assess the Opportunity 184

Conclusion 186

CHAPTER 16 Real Estate Cost Segregation 187

Overview 187

Case Study 16.1: Franchise Restaurant 188

Case Study 16.2: Apartment Complex 189

Case Study 16.3: Assisted Living 191

Case Study 16.4: Two-Story Medical Office Facility 192




Conclusion 199


x Contents

CHAPTER 17 Research and Development Tax Credits 200

Background 200

Case Study 17.1: Engine Service Firm R&D Credits 201



Conclusion 208

CHAPTER 18 Strategic Sourcing 210

Overview 210

Case Study 18.1: $1.6 Million in Annual Savings forFood Distribution Company 211

Case Study 18.2: Private College Saves Morethan $200,000 212

Case Study 18.3: Multi-Project Strategic Sourcing 212




Conclusion 221

CHAPTER 19 Telecommunications Auditing 223

Overview 223

Case Study 19.1: Refund of Local Service Charges ata Transportation Company 224

Case Study 19.2: Future Savings of Local ServiceCharges at a Multi-Location Retail Chain 224

Case Study 19.3: California School District 225

Case Study 19.4: Future Savings of WirelessCharges at a Media Company 225




Conclusion 230

CHAPTER 20 Travel and Entertainment Reviews 231

Overview 231

Case Studies 20.1: How to Make $20,000 inOne Year, Tax-Free: Specific Schemes 232


Contents xi


Automation Benefits 236



Conclusion 239

CHAPTER 21 Utility Reviews 240

Overview 240

Case Study 21.1: Fortune 1,000 Manufacturer Cuts ItsUtility Costs in Several Ways 241

Case Study 21.2: Hospital Water Cost Leak Plugged 242

Case Study 21.3: Small Town Manufacturer—Electric Refund 244

Case Study 21.4: Entertainment Company with MultipleLocations Chooses Deregulation for Select Sites 245




Conclusion 249

CHAPTER 22 Selecting a Provider 250

Overview 250

Applying Discipline . . . It’s a Good Thing 250

Step 1: Form the Team 251

Step 2: Set Requirements and Success Metrics 252

Step 3: Draft a Request for Proposals 253

Step 4: Negotiate 257

Step 5: Complete Decision Analysis 260

Conclusion 262

CHAPTER 23 Technology Used in Recovery Efforts 263

Introduction 263

Data Analysis/Mining/External Data 265

Assessing Vendors against Watch Lists 282

Making the Scattergraph 286

Continuous Monitoring 288


xii Contents

Pre-Formatted Workpapers/Process Workflow/Client Management Dashboards 293

Conclusion 295

CHAPTER 24 Conclusion 298

Where Do We Go from Here? 298

What Else Can You Do? 298

APPENDIX 1 Additional Publications Related to BusinessCost Savings 301

APPENDIX 2 Accounts Payable 304

Risk Assessment Questions by Profit Leak 304

APPENDIX 3 Records Retention and Right to Audit 312

APPENDIX 4 Discussion Paper Continuous Controls Monitoringwith ACL AuditExchange 2009 and ScriptedAnalytics 314

Purchasing Payables and Payments 315ACL AuditExchange 2009 316Purchase-to-Payment Cycle: Critical Processes

and Activities 316ACL Analytics Technology 317Customer Successes 319Client Benefits 319

APPENDIX 5 Tapping the Strategic Potential of Procurement 322

Challenges 324Key Success Factors 326Fulfilling Potential 330

Index 331


About the Author

Richard B. Lanza (CPA, CFE, PMP), President of Cash Recovery PartnersLLC, helps companies identify their hidden financial assets, mostly usingtechnology and referring them to specialists. He has a decade and a half ofexperience in audit technology and recovery auditing, becoming a leadingauthority in these areas. His free Web site, findmillions.net, helps com-panies identify cost recovery and prospective savings in all areas of theirbusiness.

He is the author of 15 publications and training courses and has writtenmore than 75 articles for major audit and accounting publications discussingaudit software, cost recovery, and fraud detection, including the followingbooks:

■ Proactively Detecting Fraud Using Computer Audit Reports■ Buyers Guide to Audit, Anti-Fraud, and Assurance Software■ 101 ACLTM Applications■ Payables Test Set for ACLTM and IDEATM

■ Revenue Test Set for ACLTM and IDEATM

■ Fraud Detection and Cash Recovery Using ActiveData for ExcelTM

Rich has worked for companies ranging in size from $30 million to$30 billion, and in all has helped them save money through the use oftechnology and recovery auditing. While he has more than 16 years of expe-rience and is a recognized leader in the use of audit technology, Rich alsofounded auditsoftware.net, a free Web site devoted to using technology forgenerating bottom-line results.

He is a frequent and popular speaker at industry events, such as the con-ferences and seminars of the Institute of Internal Auditors and Associationof Certified Fraud Examiners.

From a volunteer perspective, Rich is a member of the Institute ofInternal Auditors Board of Research and Education Advisers and serves aschairman of the board for the North Jersey Institute of Internal Auditorschapter.

xiii


xiv About the Author

A graduate of Pace University, he is a member of the American Instituteof Certified Public Accountants (AICPA), the Association of Certified FraudExaminers (ACFE), and the Project Management Institute (PMI). Rich wasrecently awarded the prestigious Outstanding Achievement in CommerceAward from the Association of Certified Fraud Examiners.

Chapter = Date: June 30, 2009 Time: 11:32 am

Foreword

I’ve been in the world of finance and internal audit for more than 18 years.I’ve worked in several different industries, with both public and private

firms. The management styles and corporate philosophies I’ve experiencedvary as much as the products and services those companies manufactureand sell. I’ve dealt with all of the Big Four accounting firms, and a litany ofconsulting firms.

How often do we hear about companies wanting to “cut costs”? I justrecently read an article about a large media company instructing its employ-ees that they would not be reimbursed for going to lunch with other in-townemployees. I’ve experienced this type of cost cutting in the past, but is thistype of action really going to have a significant impact? The ironic thing isthat when companies decide to cut back, they hire expensive consultingfirms to tell them where they can save money, excluding their own fees, ofcourse.

So, in addition to whichever cost-cutting measures you choose, why nottry to find money in-house through nontraditional revenue channels suchas cost recovery? Perhaps we as humans are skeptical in nature and havealways been trained to believe that we can’t get something for nothing. Whyelse would you refuse to allow someone to examine your payables to seeif you’re due any money? Well, here are a couple of reasons.

In my opinion, the primary reason for not wanting to explore cost recov-ery is that people do not want their mistakes to be highlighted. Considerthis: If you mistakenly paid an invoice(s) twice, and the amount was, say,$200,000, would you want your boss to know?

Another reason that I’ve heard for not wanting to explore cost recov-ery is that “We don’t want to upset our vendors.” Hmmm . . . sounds like awonderful business partnership to me. The vendor overcharges or doublebills your company, and you remain silent. Who are you dealing with, DonCorleone (a.k.a. the Godfather)?

In any case, perhaps you as an individual are not at fault. The vendormay be trying to cheat you, or increase their revenue by double billing andhoping only a few will catch on and complain. Maybe the vendor madean honest mistake, or maybe your systems are not sophisticated enough

xv

Chapter = Date: June 30, 2009 Time: 11:32 am

xvi Foreword

to distinguish duplicates, and so forth. However, cost recovery is a greatopportunity to review processes, procedures, strengthen internal controls,and detect fraud.

In these extremely difficult economic times, no effective argument canbe made against cost recovery. It requires no upfront capital, no significanthuman resources, and the payback is often significant.

Selling Cost Recovery

If you are in the position of having to convince others (as I was when sell-ing a cost recovery audit related to advertising expenditures), my adviceis to keep trying. You have nothing to lose and everything to gain. If bychance (and I highly doubt this), you don’t recover any funds, you end upconfirming the strengths of your payables systems, processes, and peoplewithout incurring any costs. Imagine what it would cost to hire an inde-pendent auditing firm to arrive at the same conclusion. But, if you recovermoney (and you probably will), you just might end up a couple of rungshigher on that proverbial corporate ladder. To quote Nike, “Just Do It!”

Now that you’re convinced of the benefits of cost recovery, and havegotten the okay to proceed, where can you go for help? Well, you can startby reading this book. I’ve had the pleasure of knowing the author, Richard B.Lanza, since 1989. We attended Pace University together and were colleaguesfor a short time at a major retailer.

Rich provided valuable accounts payable data analysis services withthe unique twist of dealing with foreign currencies. My company had sub-sidiaries in various countries, each with a similar payables system, but therewas no possible way I would have been able to obtain such a large volumeof data for each country in a format I could understand, let alone review it,had it not been for Rich. This saved a great deal of time in the field (andassociated travel expenditures) because it allowed me to pinpoint areas offocus.

Rich has an amazing command of systems, data, and so on, and canbring the concise story out of the mountain of details. He has a true passionfor cost recovery. Rich focuses on client needs; doesn’t speak with a litanyof slogans, corporate buzzwords, and so on; and won’t try to sell servicesyou don’t need. Remember, his business is cost recovery! I am pleased andproud to call Rich a friend and business partner.

Ronald T. AltomareDirector, Internal Audit and System’s Control

Barnes & Noble College Booksellers


Preface

How We Got Here

At my core, I am a CPA. Unlike the normal CPA career that goes from externalauditor to accountant to controller, and then one day, just maybe, to CFO, Iam an entrepreneur. As an entrepreneur, I find myself consistently figuringout my next service and how to package it for the marketplace. As a writer,I am always thinking of new concepts to present to the reader. I believe itis useful to provide this perspective, as it is that basis for developing a costrecovery publication.

My career started as a standard CPA’s would. I worked as an externalauditor. I then became a data analysis expert when I started working withACL software. With ACL software, a nonprogrammer like myself could pro-cess data in ways previously unimagined. To this day, I still believe I can domore with ACL software than most programmers can do with million-dollarcomputer systems. For this reason, I initially befriended the purchasing direc-tor of a Fortune 500 company who needed these data to improve his buyingdecisions.

By turning this data analysis toolset to the purchasing and accountspayable area, I discovered that I could find errors and sometimes even fraudwithin the data. With this removed, it led to savings for the company. Again,an auditor at heart, I created more and more data routines to help save andfind money for companies. When the external and internal auditor marketssaw little use for data analysis because they were content to sample auditpopulations, this happened. We used to joke that auditors would sample 30items because they knew that if they audited 100 percent of the populationwith a data analysis tool . . . they might actually find something! I, frankly,grew a bit disgusted with the audit communities that were more interestedin issuing clean audit reports than in getting to the root of the problem andsaving companies money in the process.

xvii


xviii Preface

While all of my skills in cost recovery and data analysis were develop-ing, I was collaborating heavily with like-minded colleagues, using e-maillistservs and, later, the World Wide Web. Under the tutelage of Jim Kaplanat auditnet.org, who has created an amazing online community for auditors,I discovered that I could learn much more if I banded together with a com-munity of like minds. This was the basis of auditsoftware.net, my Web sitedevoted to the use of any technology to improve the audit process. Overtime, my research reached into every facet of this industry. I achieved thisby speaking to vendors and the users of the technology, which led me towrite The Buyer’s Guide to Audit, Anti-Fraud, and Assurance Technology,with Dean Brooks and Mort Goldman. This was the first book dedicated tolooking at all aspects of audit technology and provided a list of vendors foranyone looking to purchase the technology.

Now That We Have a Model, How Do We Reapply It?

Under the theory of “if it ain’t broke, don’t fix it,” I decided to use the sameconcept. This time, instead of technology to help the audit process, I decidedto focus on cost recovery. This was much easier for a few reasons:

■ My data analysis services were much easier to promote to cost recov-ery providers and companies where there was no audit slant to thembecause it focused on savings. Even auditors themselves found the wordaudit to be limiting because there is a stigma associated with it. Com-panies quickly found that for a few thousand dollars they receivedreporting that saved them hundreds of thousands, if not millions. Inone instance, one report found over $100 million for a company. Toobad I only charged them for a few hours of my time because 1 percentof that number would have made me a very wealthy man.

■ There was nothing written on the work done by cost recovery auditors.We completed an extensive Web survey (mostly through Amazon.com),and while there were a few books in certain specific areas of recoveryand a few more on how to save money, there was no comprehen-sive guide ever developed explaining the entire industry. (Please seeAppendix 1 for the research we completed in this area.)

■ Knowing that it was difficult to market their services and the conceptsunderlying their value, cost recovery providers were more than excitedto help provide content for Web sites, articles, books, and whatever elsewould help market their business imperative.

■ Generally speaking, it became easier to gain interest from companies.I remember meeting a sales coach earlier in my career (Keith Rosen of


Preface xix

ProfitBuilders.com), who told me he wished he had my cost recoveryservices to sell full-time because it was the easiest sell imaginable. Whatother service costs nothing until the company gets a financial return andeven then, it is on money they never knew they previously had? Insteadof any sales gimmicks, he simply told me to explain what I did in aminute or less and the company should simply buy it.

So with this model in mind, I set off to talk to as many recovery firmsas possible. While I was already working for a couple of firms doing theirdata analysis, I found that there were hundreds out there to choose from. Ispoke to them. I tried to understand their business model, and then workedto include their pitch in my Web site findmillions.net. The goal of the site wasto make it easier for companies to better understand the nature of recoveryfirms and to get started saving money. As any recovery firm will tell you,the sooner you start, the sooner you save. Of course, the longer you wait,the better chance you have of never recovering anything.

As I spoke to more firms, read their Web sites, and translated as best asI could what they do to Web site articles and other content, I realized thatwe had again the makings of another book. This time, instead of it beingabout an obscure audit software market, it was now about how companiescould save money.

Why Use This Book?

Professionals are being challenged daily to enhance their business processesand increase their own efficiency at the same time. This usually translatesto having fewer people to do the job. I see this book helping in five keyways:

■ Saving time in cost recovery provider selection and implementation. Anyprofessional use of cost recovery services will receive an outline of everyrecovery category, key questions to ask themselves, and key risks toconsider within their organization. Collectively, this could take weeksof research and it is all being provided in a published road map.

■ Seeing the cost recovery market as a whole. This is the only researchdocument available today that looks holistically at the cost recoverymarketplace, and this was realized after days of Web research.

■ Covering the niche markets. Specialized recovery specialists are oftenthe best choice for the job, but they don’t necessarily make it into gen-eral business periodicals. There is a natural tendency for the mediato talk mainly to and about the larger, more established vendors. We


xx Preface

deliberately sought out numerous small start-up enterprises that havefewer than 10 employees, knowing that some will be major players inyears to come given their compelling business models.

■ Setting realistic priorities. The hard decision is often not whether to docost recovery, but when and how far to proceed in the project. Dowe start all audits at once? What recovery options are the best for ourcompany? What sort of training schedule will be required to transferknowledge? This book will help answer these and many more questions.

■ Planning long-term strategy. Even the most experienced recovery spe-cialists can learn something from this book about future trends, newservices, and evolving best practices. Companies will also learn to lookat cost recovery as not a one-time event but rather a continual processof improvement that, all along the way, provides cash savings to theorganization.

All organizations spending cash should be interested in this book, withcost recovery and cash savings being the main motivator. Identifying hiddenassets that a company owns and other ways to save company cash is alwaysrelevant because it helps companies grow more profitable and professionalsto be noticed and rewarded for their efforts. Toward that end, this book’sgoal is to make it easier for companies to better understand the nature ofrecovery firms and to start saving money . . .before it disappears.


Acknowledgments

Iwant to express my thanks to:

All of the cost recovery providers for their ingenuity to create a servicethat is based solely on performance and finds savings for companiesthat were previously unknown. I consider myself so lucky to workwith them.

ACL Software, for honing my mind to think like a data analysis engineand the guidance provided by Harald Will over the years.

The Association of Certified Fraud Examiners, most particularly JosephT. Wells, for providing the taxonomy of fraud so that I could sys-tematically attack it. Without his encouragement for detecting fraud,I would have never gotten started in the cost recovery business.

Jim Kaplan, founder of auditnet.org, for teaching me the value of col-laborative networks on e-mail and then the Web.

My children, for giving me a reason to get up every morning so that Imay provide them a foundation to build greater works in the future.

My wife, Jessica, for her love and support throughout the writing of thisbook.

xxi



How to Use This Book

The book will provide a step-by-step process for any department wantingto complete a cost recovery effort of their company spend. We tried to

draft the book in a logical progression to guide the reader through theprocess of recovery as follows:

■ Chapter 1: Benefits of Recovery Services. Any service needs to start byexplaining the benefit to a customer who has marketplace needs. Onlyafter a customer understands the benefits will she be willing to moveforward with assessing the risks and opportunities associated with costrecovery.

■ Chapter 2: Overcoming Obstacles. Unfortunately, while cost recoverymakes so much sense for companies, there are still obstacles to imple-mentation. The reader should make sure he prepares himself for theroad ahead to internally sell recovery.

■ Chapter 3: Assessing Opportunities and Risks. The goal of this chapteris to provide the reader with a methodology to assessing the recoveryopportunity and the risk of the company creating errors. While not beingtoo specific to the actual cost recovery categories (see Chapter 5), theobjective is to provide a broad framework to mapping out the company’sopportunities and then laying down a process to ensure the opportunityis maximized for the long term.

■ Chapter 4: The Overall Cost Recovery Marketplace. Now that the readerknows what is out there to recover at a high level, she needs to under-stand how the cost recovery market works and the trends affecting itbefore going deeper into the recovery categories.

■ Chapter 5 through 21: Cost Recovery Categories. With a foundation laid,the reader is in a position to understand every aspect of specific recov-ery categories. The objective of these chapters is not to explain exactlyhow to complete a recovery assignment but rather to explain the pro-cess being taken by the recovery auditor, what specifically to look for atthe company when assessing the opportunity, and what to look for ina vendor in the recovery category. Case studies provided in each

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xxiv How to Use This Book

chapter assist the reader’s understanding of the true potential in eachcategory.

■ Chapter 22: Selecting a Provider. As it simply makes sense to bring in aprovider to assist with recovery efforts, at least initially, the reader needssome key considerations for making the best selection possible.

■ Chapter 23: Recovery Technology. No publication on recovery would becomplete without a discussion of the technology used by firms to focustheir testing efforts and manage their engagements. Technology is thethird component of the people, process, and technology paradigm, butis just as important as the first two categories.

The book concludes with the selection of a provider to start cost recov-ery at a company, which is the starting but should not be the ultimate endgoal for the company. The company should strive to implement best prac-tices as provided by the recovery firm to improve their processes, therebylimiting their future errors. Over time, they may start their own internal auditfunction that is trained in the specific categories of cost recovery, or buildinternal technology to ensure the cost savings never leave the company inthe first place. All of this is done in the pursuit of a more efficient andeffective organization.

Chapter = c01 Date: July 9, 2009 Time: 4:18 pm

CHAPTER 1

Benefits of Recovery Services

U.S. General Accounting Office Report1 “Recommends”Recovery Auditing

Like many private sector business leaders, circumstances in 1996 dictatedthat the Secretary of Defense evaluate the possibility of using a recoveryaudit firm to uncover overpayments made by the Department of Defense(DOD) to their vendors. When the final results were in, the United StatesGeneral Accounting Office (GAO) issued its assessment of the completedprocess. The results were instructive. (For the full report from the GAO,please visit http://gao.gov/archive/1999/ns99012.pdf.)

The effort began in September 1996, and the recovery audit coveredpurchases made during fiscal years 1993 to 1995. In late 1997, Congressauthorized expansion of the program, and in an August 1998 memorandum,the DOD Comptroller encouraged DOD agencies “to use recovery auditingas a way to identify and correct payment problems.”

The methods used resulted in the detection of $19.1 million inoverpayments—about the cost of four new M1-A2 Abrams Main Battle Tanksat the time.2 Efforts to identify additional amounts continue. Of the $19.1million in overpayments, $12.4 million was due to cash discounts not takenor deducted at the wrong rate, $2.2 million was related to most favored cus-tomer terms not received, $1.3 million was due to duplicate payments, and$1.2 million related to credits not taken.

The fact that the overpayments were made four to six years before theaudit recovery began made overpayment identification or recovery chal-lenging. This was yet another example of “get it early or it’s gone,” whichis word to the wise for anyone looking to recover lost profits. Another hur-dle encountered by the recovery firm was when it realized that the DODpayment system did not retain all of the information needed for analysis. Insome instances, the firm found that it had to manually sort through records.

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2 Cost Recovery

So another lesson for the private sector is to make sure your computersystem stores all necessary and critical information.

In addition to identifying overpayments, the recovery firm also rec-ommended methods outside the scope of its contract to reduce futureoverpayments. This is not unusual and another reason why recovery auditspay off. The DOD concurred with the recommendations made by the recov-ery firm and then worked to implement them to reduce and eliminate futureoverpayments.

While the GAO report did not suggest any definitions, what followsare two key concepts that will be defined here for future reference in thispublication:

■ Cost recovery. Cost savings that are either retrospective or prospectivein nature and result from the detection of internal or external errorsand fraud; industry benchmarking; previously unknown tax advantages;contractual analysis; and contractual or price sheet compliance.

■ Recovery audit. The methodical process of reviewing disbursementtransactions and related supporting data to identify various opportunitiesfor cost recovery and that often suggest new process improvements andtechnology to ensure such cost recoveries are minimized or eliminatedin the future.

Top Benefits of Cost Recovery

The aforementioned GAO report was an extensive analysis of a cost recoveryengagement and from it some simple truths can be inferred. In its essence,the service found cash that the DOD never knew it was missing and itobtained process improvements to ensure that such cash is never overpaidagain.

These two simple truths are explored further here:

■ Every process flow has a margin of error. In a process flow of $100 mil-lion, a 0.1 percent margin of error (that is, 0.001) translates into $100,000in recoveries. This statistic is used frequently for accounts payable audits,and while never fully validated, it is a reasonable starting point. Essen-tially, the process flow in this example is 99.9 percent accurate. Otherrecovery services find much more in percentage form but may look ata smaller area of spend, such as the advertising expense of a company.

■ Incur costs only after getting paid. Companies generally will only pay arecovery firm if the company deposits cash into their bank account asa recovery. The practice is so productive, and the effect on the bottomline so substantial, that many corporations hire more than one recovery


Benefits of Recovery Services 3

auditing firm to analyze the same data. That is in addition to compa-nies’ own auditors, who usually find the most obvious errors. Recoveredoverpayments are found money and add directly to a company’s bottomline, except for the percentage paid to the recovery auditor.

■ Measure the need for improvements. Rather than identifying vague con-cerns within a business process, a recovery audit finds quantified cashleakages within the process. These are deposited at the company’s bank.Then, depending on their materiality, allow the company’s managementto assess whether it will work to improve its operations. Some compa-nies never improve their operations and view recovery audits as a safetynet that will collect the error rate in the process. This approach is moredetective in nature but is a valid approach, especially if the error rate atthe company is found to be relatively low.

■ Provide the company an opportunity to learn from outsiders as to indus-try best practices. Such best practices come in the areas of process,technology, and people skills based on the auditors’ experience in vari-ous other similar companies. Systems (and the demands made on them)are growing as payment departments are shrinking. Companies merge,change systems, outsource, and have employee turnover. All of thesescenarios contribute to potential lost profits and, therefore, best prac-tices are needed just to keep pace with the rate of change. When bestpractices are applied to processes, any benefits received can be for cur-rent procured activity but can also apply to future activity and, hence,future savings.

■ Improve Sarbanes-Oxley compliance. As is discussed in more depth laterin this chapter, another more recent motivation for conducting a recov-ery audit is to help comply with Sarbanes-Oxley. A recovery audit coversmuch of the same ground a CFO must cover to ensure the integrity ofa business, from process controls to contract compliance to paymentchecks and balances. An asset recovery audit firm will normally providedetailed reports on the financial health and well-being of your paymentsprocess and contract compliance. You may think of a recovery audit asan extension of your existing audit strategy. In all likelihood, however,the return on your recovery audit investment will exceed that of othersimilar pursuits.

■ Add free resources to the audit team. Audit teams can be supplementedby additional staff of recovery auditors who are paid only if they add tothe company’s bottom line. It is almost a best-case scenario for hiringemployees, and recovery firms are more than willing to oblige.

■ Add profits by not increasing sales. Most companies work under themodel that if they can just increase sales, their net profits will increase. Asan alternative to increasing sales, however, recovery audits have distinctbenefits, since recovering $1 million to the pretax bottom line can equate


4 Cost Recovery

to $10 million in sales at a company. Nonsales departments are engagedand increases in fixed overhead and working capital required for moresales are avoided. Lastly, it is not uncommon in some businesses thatthe more they increase sales, the more they lose money. While it soundsimpossible, some companies will sign up for sales price arrangementswhereby every additional unit costs them more than they can sell it forand, hence, they lose more for every unit. Recovering costs will neverhave this effect.

■ Create an air of transparency between your company and your vendors.The recovery auditor may find nothing. But even then, the companystill knows more definitively that there are not any cash leakages beingheld by vendors.

■ Get it before it disappears. As profit recoveries are time sensitive, thelonger an organization waits, the more difficult it is to identify, validate,and retrieve them. A no-risk contingency-based audit is the most cost-and time-effective way to recoup your lost dollars. Lastly, there is nodownside with contingency engagements as, say, $0.70 after recoveryfees for every $1 recovered a company never knew it had is better thannothing.

Recovery to most companies is a no-brainer decision. While all auditareas may not be material enough to make a review fruitful, even the smallestof spend could benefit from applied recovery audit techniques.

Top Reasons for Recovery

At this time, it may be useful to see how such recoveries are found so thatthe potential can be visualized. There are five broad activities that can beconsidered under the heading of recovery auditing.

■ Internal error and fraud. These are recoveries that are due to an internalmistake in processing a payment or an employee who has a conflict ofinterest with a vendor.

■ External error and fraud. Such recoveries are due to vendor mistakesor an attempt to defraud an organization, which may take the form ofpurposefully sent duplicate invoices.

■ Industry benchmarking and tax advantages. Experts who understandthe marketplace or the tax code can apply this knowledge to organiza-tions that were previously ignorant of such information. With this newinformation, they can make better business decisions, which can leadto previous and future savings.

Documents

Lanza Praise for • How the cost recovery market works Cost …download.e-bookshelf.de/download/0000/5745/01/L-G-0000574501... · A ProfiT cenTer Cost ReCoveRy Turning Your Accoun