For a business, overpayment to a supplier can cause numerous complications. Not only might it result in damage to the company’s financial standing, it can also result in a time-consuming process to recover the lost funds. To walk us through how a company can ensure that it does not make such problematic mistakes, we met with Phil Beane, senior vice president of global field operations for APEX Analytix.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

When a business makes an overpayment to one its suppliers, it can result in not only damage to the company's financial standing, but a costly and time-consuming process for recovering the payments. To identify how a company can prevent this kind of problematic mistake, today we will be talking to Phil Beane, senior vice president of global field operations for APEX Analytics.

What do you consider to be the cause of overpayment to suppliers? How does this impact a company's financial standing?

[Beane] As you might expect, there are many, many root causes to overpayment, but as I think about what are the leading top three or four that we see on a regular basis, the first would be the duplicate payment. That duplicate payment can take many forms or fashions. A lot of times we see this as a cause of incomplete or inaccurate master data. You get situations like you've got multi related vendors, or vendor coding errors. It's just ensuring that you have accurate and complete master data, will stop that first one, which is the duplicate payment.

Another one that we see quite often is returns. You might think, boy, returns would only be an issue with organizations that are manufacturing in nature, but it's really not the case. If you think of most businesses, they're bringing in some sort of materials. Quite often, we find that we will recover a lot of overpayments with the root cause of returns. The issue is that the accounts payable organization does not find out that a specific product was returned, so without that occurring, there's no credit that's actually entered within the system. Those surface on a regular basis.

Another is keying errors. It's fair to say that most organizations are moving toward electronic invoicing, however, in the US, there still are a large portion of invoices that are manually sent in, which means they have to be manually keyed. Anytime there's manual keying that occurs, there will be keying errors that will surface. Things like I miskeyed the invoice number, or I keyed with tax, or without freight, or with or without. That generates a lot of keying errors.

The last one is probably more around canceled invoices and contracts. A business will procure a service, or some sort of solution, maybe even prepay for that. Then, at some point within the life cycle of that service or solution, either a specific invoice or maybe the entire contract, gets canceled. But that information is never passed back through to the AP organization, so they continue to pay those invoices on a regular basis.

Regardless of the root cause – although I mentioned four, there are many more – these certainly have a negative impact to a company's financial situation. A lot of times what we see is that a company will be doing business with a supplier, have an overpayment, and maybe they stop doing business with that supplier, and or the supplier goes out of business. That is lost revenue, which a lot of times leads to lost profits.

If you will, I'll share a little stat. At APEX, we prevent, either through our global recovery audit services, or our First Strike software, roughly $3 billion annually. It just gives you an appreciation for how big of an issue overpayments are.

Generally speaking, what is the process of recovering these overpayments?

[Beane] You never want to answer with, well, that depends, but it does somewhat. Depending on the actual type of overpayment, that'll drive the way that you go about recovering it. I'm going to keep it in general terms, and I'm going to group it into three parts.

As you would expect, it really starts, first, with the acquisition of data. So, regardless of the type of overpayment, you have to acquire data. That data, typically, consists of things like master data, invoice data, payments data, PO data. Depending on the type of overpayment, you may get things like EDI data, point of sale data, inventory, and contracts. It can be a massive data exercise, but the first piece is you must acquire the data.

The second piece of this recovery process, I like to break it down into two pieces. The first is leveraging advanced technologies. The second is leveraging experienced, tenured auditors. The key to those auditors are being attentive to that customer vendor relationship. So, you've got this technology that's managing the data, and it's identifying the overpayment. Then you've got these experienced auditors that have an appreciation for, is this really an overpayment or not? That's really that second piece.

The process concludes with collaborating with the vendor. You've acquired the data, you've used the technology to identify the overpayment, you've got experienced auditors that have confirmed it. Now, you've got to collaborate with that supplier to confirm, yes, indeed, the supplier did receive the overpayment, and work with them on acquiring those funds to get back to the customer.

That typically comes in one of two ways. Assuming that the business and the supplier are still actively engaged, the supplier will provide a credit memo that the business will book on their business. There are some situations where maybe you have a seasonal supplier and/or maybe there are no outstanding invoices for the supplier, and in those situations the supplier would be asked to provide a refund.

How can businesses go about identifying and preventing these payment errors? What are the techniques?

[Beane] There's the obvious, like being diligent, having processes and procedures documented, ensuring that you're cross training, leveraging metrics and KPIs, all the basics that you would want to have in place to try to stop this. If you think about, boy, what are the most impactful things that an organization could do to prevent this, it really falls into two areas. The first is to have an overpayment prevention software that leverages data from all ERPs, ingests this data on a daily basis, and identifies overpayments prior to going out the door. You might think, boy, why wouldn't the ERP system do that?

ERP systems are designed and are great at getting transactions entered into their system, and then paying them. They have some rudimentary overpayment prevention that says, if every piece of the actual payment is the same, don't let it go out the door. What they're not designed to do is to look at those anomaly overpayments. Nor do they have the ability to say, okay, we have three ERP systems, I can't look across all three ERP systems.

Again, having that overpayment prevention software in place ... I don't want to say one is more important than the other, I'd say they're equally important, but that's the first piece.

The second is to implement a supplier information management, or a SIM application. The beauty of this is it allows the supplier to actually control the entry and the maintenance of their contact and master data. I talked a little earlier about, boy, you want to make sure that master data is complete, so having this in place.

There are a couple byproducts of this. One is it allows the actual payer, or the company, to just constantly monitor that supplier, to look for things like business risk, and global regulatory risk, and currency and business process compliance, and fraud risk. It allows the payer, or the business, to monitor that.

There's also a second benefit, which is a financial benefit, which is it allows the actual payer to pay the supplier early and, in return, get a discount on that.

We've had many clients who have implemented both an overpayment prevention software, and a SIM. As you know, most AP organizations are cost centers. Through savings of implementing these overpayment prevention solutions, they've been able to actually drive their AP centers to profit centers versus the traditional cost center. Certainly, if you're a global AP organization, it's something to think about.

How can you identify when a business has a high risk of errors? What are some top signs?

[Beane] I have saying that I often talk to people about, which is change equals opportunity. That can be a good thing or a bad thing. What I mean by change is let's just say you have a change in your ERP system. A lot of ERPs are moving to cloud-based solutions. Let's just say you're on SAP ECC 6.0, and you move into S 4Hana. During that migration, there's a massive change there, so a lot of disruptions. You can have things that were migrated incorrectly or miskeyed, so that's one area.

Outsourcing, whether it's on-shoring or off-shoring: did you have your processes thoroughly documented? We've seen instances where there was an AP organization being handled internally and then they decide to outsource it. By the way, this could be to a BPO or a captive.

It was an exception process that was handled the same way, by the same person, for 15 years. Although it was thought to be documented, as soon as that occurs there's a higher risk of overpayments recurring.

Inaccurate and incomplete master data, boy, that's always ... anytime you've got inaccurate data within your master data, boy, that creates opportunities.

Another is mergers and acquisitions. Large companies are constantly evaluating opportunities to merge with other firms and/or acquire. During those mergers and acquisitions, again, a big disruptor, lots of change. That's generally what creates that higher risk, that drives those overpayments.

What other top concerns should CPAs be aware of in regard to vendor management?

[Beane] I'll answer that with a couple concerns. Then, I'll add just some added value that CPA firms can provide their customers.

We'll start with the concerns. There are lots and lots of concerns. The obvious is what I've talked about already, which is, boy, it is just imperative that you have accurate and complete master data. Other things that should be concerning is making sure that their customers are proactively monitoring for fraud and risk. Looking at things like vendor master, and employ, and transactional data, looking for vendor collusion.

Another big thing that we're seeing a lot now is phishing attacks on a vendor's email system, and then once you get that information, logging into portals, and changing bank accounts for a certain period of time, then changing it back. You want to constantly be looking to have proactive solutions that monitor for this. Other things like bouncing your master data against prohibited entity lists, like OFACT, and FBI, prison listing, and those type lists. I'd say the first one is just having a proactive monitoring solution for fraud and risk.

The second one, although it may sound similar, it's not; it's really looking more and evaluating performance business risk. Looking at things ... not fraud- and risk-related, but more like business risk, and things like looking at a supplier's credit score, and looking for things like negative news or press, performing surveys with your suppliers to get information, looking for geopolitical risk. It's just companies constantly evaluating vendor quality, and actually rewarding those suppliers who are performing really well. The byproduct of that, through that consolidation, is cost savings for companies that are doing this.

I'd say, from a concern standpoint, first looking for fraud and risk. Then, the second is just ensuring that there's no business performance risk. The other piece of this is really more like, boy, how can CPA firms provide additional value back to their customers?

The first is recommending ways to create more benefit between the trading relationships. Like, I talked a little bit earlier about cash discounts, but working and recommending that their customers implement a dynamic discounting program or look toward doing things like factoring of vendor receivables. It's just providing some additional insight and some recommendations.

The other would be looking at, or providing and recommending, a contingent-based recovery audit for their customers. The beauty of these contingent-based recovery audits are a company owes nothing to the recovery audit firm, unless value is provided.

We want to be monitoring for fraud and risk, business risk. From just an additional value that they could provide, how can the supplier – the actual company or business – improve their business relationships, a lot of times that can be done through factoring and dynamic discounting. Then, looking to do overpayment recovery audits.

They're low risk, and a lot of times a lot of value. It gives you those overpayment root causes that we talked about earlier.