One time vs. Ongoing Audit – What is right for your organization?
Myth Busters! One time vs. Ongoing Audit
By Sharon Watkins, CEO of RadiusPoint
There are many questions that come up when considering a one time audit on your telecom or utility invoices versus an ongoing monthly audit. After years of research, hands on experience, and daily Client interactions, the ongoing audit would most often be more beneficial to an organization.
- Would you rather have overcharges refunded to you each month or would you rather wait for 2 years or more to have an overcharge refunded to your company?
- How much money are you leaving on the table for taxes and interest when you are waiting 2 years or more for an overcharge to be refunded to your company?
- Are the telecom vendors really only giving back 6 months or less of an overcharge found in their favor?
- Are there really that many overcharges identified during the one time or ongoing audit? Is it worth all of the time involved in gathering invoices?
- When you use an Expense Management company, do you relinquish all of your control over the invoices?
- Have your Telecom vendors reduced their refund policy for erroneous charges to 6 months or less?
These are just some of the questions that arise when contemplating a one time audit or the use of an Expense Management company to manage the telecom, wireless and utility invoices and services. Many organizations plan to have their telecom or utility invoices audited every 2 years. Would it be more advantageous to have that audit monthly and recoup your overcharges each month instead of having your vendors play with your money over that two year period?
There are many things to consider when starting the process of the telecom or utility audit. If the services are being sent out for a Request for Proposal (RFP), there are certain time consuming tasks you must consider. These tasks would have to be completed every two years, even if you hire the same audit firm each year:
- Time to create the RFP
- Time to evaluate the RFP
- Expertise to evaluate the different service offerings, i.e. level of service – surface audit or in-depth audit
- Time involved with vendor meetings
- Contract negotiations
- Gathering 2 years of invoice copies
- Gathering vendor contracts
- Gathering other needed documentation for auditors
- Answering questions from auditors regarding the environment, services and locations
The gathering of the documents and time involved in the RFP process may sap your team of time that they need to perform their daily tasks and for some organizations, the time constraints are the biggest obstacle in getting the audit on the schedule. Maybe it would be easier for the auditor or an Expense Management company to get the invoices on a monthly basis. But how would they be compensated for this extra work?
An Expense Management company for telecom, wireless or utility invoices would be receiving your invoices monthly as a part of their services to manage the full lifecycle of the invoices, from receipt to payment. If this vendor is already processing your invoices and allocating the charges on a monthly basis, performing a monthly audit is the next logical step in managing the expenses.
The financial arrangements vary with the audit firms that are hired to perform the one time audit. Knowing what type of arrangement that you are signing on for is imperative as a complete and thorough understanding will eliminate any confusion on cost. While it may be appealing to hire a firm on a contingency basis, i.e. they only share in what is found, just know that with this type of arrangement, there can be many pitfalls that will ensure that you are not getting a full and complete audit.
Some of the issues of a contingency based audit are:
- Typically only identifies low hanging fruit
- A full inventory of all services and cost is NOT completed
- There is a charge for savings identified, not realized
- A Cost Avoided charge applies to any overcharges identified or optimization recommendations whether they are implemented or not.
- Your team must identify every issue that has already been reported to the vendor before the work starts, or the audit firm will be able to take credit for any refunds or Costs Avoided.
What is involved when your audit firm only identifies the low hanging fruit? This most often involves very simple contract issues and third party charges that are on your local service invoices. This type of surface audit involves your audit firm providing a report of your overcharges or refunds without providing a complete inventory of your services, i.e. every phone number or circuit number identified with the physical address, all monthly charges detailed and the use of the service.
When do the Cost Avoided charges come in to play and how are these calculated? Most of the Contingency Audit firms expect to be paid on Cost Avoided for a specific period of time. This would involve the audit firm identifying a phone line that is no longer in use, making a recommendation to cancel the line and then calculating a Cost Avoided for a 12 or 24 month period. This may or may not involve the audit firm actually canceling the line, so it is imperative that you know who will be responsible for ending the services so that your organization will actually realize the savings.
The example below outlines what a Contingency based audit would charge.
|Refunds Identified||Example of Error||Monthly Fee in error||Refund Achieved||Payment to Audit Firm|
|35% of One time credit||Long Distance plan erroneously placed on local service invoice||$100.00||$600.00||$210.00 ($600.00 x 35%)
Possible loss of 18 months of overcharges $1,800.00 due to vendor refund restrictions
|35% of One time credit||Contract error on MPLS services||$52,000.00||$312,000.00||$109,200.00 ($312,000.00 x 35%) Possible loss of 18 months of overcharges $936,000.00 due to vendor refund restrictions|
Note the Refund Achieved – this involves a 6 month refund without any interest or taxes being provided as a refund by the vendor. Telecom and Utility vendors differ in their refund policy and over the past 4 years have shortened their refund time to six (6) months or less. Many of the vendors have a one (1) month refund policy that has to be fought against by the audit firm just to retrieve monies overpaid by the Client.
|Optimization Cost Savings||Example of Recommendation||Monthly Fee (includes taxes and fees)||Cost Avoided||Payment to Audit Firm|
|35% of Cost Avoided calculated for a 12 month period||Remove phone line that is no longer needed||$85.00||$1,020.00 ($85.00 x 12 months)||$357.00 ($1,020.00 x 35%)
|35% of Cost Avoided calculated for a 12 month period||Implement EFax technology to eliminate fax lines at 100 locations||$8,500.00||$102,000.00 ($8,500.00 x 12 months)||$35,700.00 ($102,000.00 x 35%)|
So would it be better to have this identification or errors and possible Cost Avoidance as a part of an ongoing monthly audit for all of your telecom and utility invoices?
Let’s explore the pros and cons of each service.
Pros and Cons of One Time audit
|Refund sharing – no fee until an error is identified||Cherry Picking or surface errors are found; no deep dive into services|
|Cost Avoided sharing – No fee until a fee is identified as avoidable or a service is optimized||Possible dispute over who found the Cost to avoid or who optimized the services
Could result in having to move to a different vendor = additional cost
Could be a requirement whether the change is made or not
|Refunds identified as errors can be retroactively claimed for up to 6 months; could be +/- months depending on vendor||The error could have occurred the entire 2 years but the vendor only allows for a credit equal to a fraction of the overcharge
The larger dollar amount of the error, the longer the vendor will take to provide the refund, could take months to recover your overcharges
|Dealing with audit firm only once every 2 years||Time spent in gathering invoices, contracts and other needed information every 2 years|
Pros and Cons of Ongoing Audit through Expense Management
|Eliminates the Accounts Payable tasks for receipt to payment of invoices||Monthly fee for lifecycle management; receipt to payment of invoice|
|Eliminates paper invoice handling by organization; Imaging performed by Expense Management company||Perceived loss of control of invoices|
|Elimination of error proactively on a monthly basis through monthly audit of invoice||Addition of Expense Management company working with the organizations vendors|
|No refund sharing/Errors are identified monthly through audit
|No Cost Avoidance fees/Detailed monthly processing allows for optimization monthly|
Hiring an Expense Management company to manage the lifecycle of your telecom, wireless and utility invoices may make more sense, if your company has more than 50 locations, multiple wireless users, has had or plans to have acquisitions or divestitures or if there are staffing constraints. An Expense Management firm can offer the following services that can augment your current staff, bringing soft dollar savings to your bottom line, as well as, identifying errors or optimization that will result in hard dollar savings.
Invoice Processing Expense Allocation
Invoice Payment Invoice Imaging
Contract Management Reporting at the Cost Center or Location Level
Reporting at the End user level Interface with Accounting Software
How would your organization be affected if you hired an Expense Management company to manage the full lifecycle of your invoices on a monthly basis that included a monthly audit instead of hiring a firm to provide a one time audit?
In the example below, the assumption will be made that the organization has $3MM annual expenses to be managed and the refunds and Cost Avoided in the above Contingency Audit example were identified during the one time audit.
|One time Audit Components||Annual cost/expense|
|Cost of Accounts Payable daily tasks in processing the invoices||$97,128.00|
|Hard Dollar Savings for Refund identified and recovered in the one time audit – Paid to Audit Firm||$210.00 + $109,200.00 = $109,410.00|
|Hard Dollar Savings for Cost Avoided in the one time audit – Paid to Audit Firm||$357.00 + $35,700.00= $36,057.00|
|Total for 12 month period (excludes time involved to create and run RFP process)||$242,595.00|
Annual Cost for Expense Management firm in above example: $42,000.00
Savings to utilize an Expense Management firm: $200,595.00
The savings would have to be viewed in a couple of ways due to the refund and Cost Avoided differences in the one time audit and the ongoing audit. The ongoing audit will allow for an immediate refund or Cost Avoided, eliminating the ongoing overpayment of an error for a 24 month period. The one time audit will most likely leave 18 months’ worth of overpayment that cannot be recovered due to the vendor’s dispute and refund policies. In this example, the loss was equal to over $900,000.00 because the audit firm could not get the vendor to refund the entire 24 months of erroneous billing.
So what makes more sense for your organization? Managing your invoices monthly and using an outside firm to audit every 2 years or having monthly assistance with the full lifecycle management of your telecom, wireless and utility invoices coupled with a monthly audit?