Michael Brown

1
Building Best in Class Processes Recovery
Auditing
Michael Brown Accounts Payable Team
Manager Aurora, Colorado
February 6, 2006
2
Agenda

• Accounts Payable at ADT
• Tyco Announces Restructuring Plan
• Benefits of Conducting a Recovery Audit
• Recovery Audit Firm Criteria
• Additional Criteria for an Audit Firm
• Ensuring a Successful Audit
• Recovery Audit Process
• Best Practice in Recovery Audit Technology
  Application
• Capitalize on Value-Added Services
• Improvements Made at ADT
• What Should Your Audit Firm Commit To?

3
Accounts Payable at ADT

• 1 million invoices processed annually
• 2 Billion annual spend
• 30 Employees
• Under Finance umbrella
• Separate from Purchasing
• 225 offices across North America
• Decentralized data entry, but centralized payment

4
1/13/2006 Tyco Announces Restructuring Plan
5
Benefits of Conducting a Recovery Audit

• You dont have to use your own resources to
• Recover lost profits
• Build Best in Class Data Analysis tools
• Gain access to Best Practices knowledge
  experience
• Receive recommendations for process improvement
• Discover explore new audit categories
• Gain Value-Added consulting services at no cost
• Ad Hoc Data Analysis
• Newly available Management Reporting
• Root Cause Process Breakdown Reporting

6
Recovery Audit Firm Criteria

• Experience and Breadth
• People
• Technical Skills
• Knowledge Sharing
• Passion for Excellence

7
Additional Criteria for an Audit Firm

• Experienced employees who have sat on your side
  of the desk
• Broad review that focuses on maximizing financial
  recoveries
• Non-intrusive service delivery
• Auditors who interface well with the supplier
  community
• Exceptional claim quality
• Maximizes recoveries by digging deeper
• Insight into your process performance the good,
  the bad, and the ugly

8
Ensuring a Successful Audit

• Define audit parameters up front
• Audit scope
• Audit schedule
• Identify approved claim types
• Establish transition between audit groups
• Define claim minimums
• Setup Claim Approval process
• Internal review
• Purchasing review
• Supplier review
• Rules for Deduction
• Dispute resolution
• Make Stakeholders aware and get their buy-in
  upfront

9
Audit Methodology
Client Activity
Connolly Activity
Combined Activity
10
Numerous Audit Categories

• Allowances
• Co-op Advertising
• Non-reimbursable Charges
• Pricing
• Price Protection
• Rebates
• Reimbursable Charges
• Terms Conditions

• Engineering Construction
• Escheatment
• Overheads
• Sales Use and Excise Taxes
• Special Deals
• Subcontracts
• Third Party Payments
• Unclaimed Property

High

• Advertising Expense
• Insurance
• Lease Occupancy
• Penalty Clauses
• Warranties

• Equipment Leasing/Rentals
• Incentives
• Quality Differentials
• Prepayments
• Substitutions
• Trade Discounts

• Back-charges
• Cost of Corrective Work
• Percentage Completions
• Refundable Deposits
• Retainage
• Returns

• Adjustment Errors
• Freight Transportation
• Non-compliance Fees

Contract Compliance and/or
Greater A/P Audit Complexity

• Currency Conversions
• Duplicate Billings/Payments
• Overpayments and Billings
• Payment Errors
• Payments Made to Wrong Vendor

• Open Credit Memos
• Paid Credit Memos
• Vendor Statements/Credits

• Cash Discounts
• Other Payment Terms

High
Low
Recovery Opportunity
11
Synergies - Accounts Payable Contract
Compliance Recovery Audits

• Single electronic data retrieval
• Maximize understanding and usage of all data
• Execute complete audit timely with all suppliers
• Single supplier statement solicitation process
• Maximize recoveries potential from all data
• Review problem suppliers from Accounts Payable
  auditing results (i.e., duplicate payments) in
  relation to their impact on Contract Compliance
• Total recovery with each supplier approach
• Execute total collection efforts with all
  suppliers
• Minimize audit impact on client and all their
  suppliers
• Single audit team approach

12
Contract Compliance Recovery Audit Added
Opportunities

• Pricing Contracts
• Tiered Pricing
• Retroactive Pricing (rebates)
• Index Pricing (i.e., for commodity purchases like
  pipe or maintenance materials lube oil)
• Other issues contract pricing, price
  protection, allowances, purchase discounts
• Unit Rate Contracts
• Time and Material based pricing
• Reimbursable Costs Contracts
• Cost Plus Contracts, Cost Plus Fixed Fee
  Contracts
• Third Party billing
• Other
• i.e., Lump Sum or Fixed Price Agreements, Change
  Orders, Construction, Subcontracts, Payroll,
  Deposits, Returns, Insurance, Sales Use and
  Excise Taxes, Licensing, Royalties, Leases, Terms
  Conditions

13
Getting Optimal Claim Approval Process Right

• Goal An effective claim approval process will
  optimize and balance for the individual client
  the following (and sometimes conflicting)
  objectives
• Maximize the quality of claims
• Maximize effective communication with
  purchasing/suppliers
• Maximize timely recoveries
• Minimize supplier aggravation
• Minimize paybacks
• Minimize the amount of client oversight/interventi
  on

14
Suggested Internal Claim Review Alternatives

• Accounting claim review alternatives
• Defining a dollar threshold
• Delineate review by claim types
• Create separate rules for sensitive vendors
• Review full claim detail or claim listing with
  descriptions
• Establish time limit for review
• Purchasings claim review alternatives
• Review merchandise type claims only
• Establish claim amount thresholds
• Review only specific or sensitive vendors
• Timing of review Before contact with vendor?

15
Suggested External Claim Review Alternatives

• Supplier claim review alternatives
• Determine notice method hard copy or electronic
• Establish dollar level for supplier notice
• Delineate by claim type
• Identify and manage sensitive suppliers
• Differentiate between notice and approval
• Deduction Rules / Dispute Resolution Process
• Authorize Auto-deduction rules
• Define process for handling unresponsive
  suppliers
• Handling audit firm and supplier disagreements
• Supplier applies claims against current years
  funds

16
Best Practice in Recovery Audit Technology
Application

• Technology is used to support auditors in
  Maximizing Total Recoveries (Accounts Payable
  Contract Compliance) it does not replace them
• Give field auditors access to the complete
  clients and suppliers-(where applicable for
  Contract Compliance) data sets
• Program a custom audit interface into data set,
  providing tools to streamline routine, audit-site
  queries
• Provide auditors with customized, production
  reports (i.e., duplicate payments, volumes by
  vendor, price fluctuations, discounts,
  allowances) based on their input
• Field train all Data Analysts so they understand
  audit from the auditors point of view

17
Sample Technology Process

• Receive tapes or other transmissions from client
  and suppliers-(where applicable for Contract
  Compliance)
• Each cartridge is copied byte for byte to disk
• Data is converted directly from client transfer
  to SQL Server
• Analysis and verification
• Produce printed reports
• Fine tune proprietary audit software
• Databases copied to the on-site data mart for
  direct auditor access

18
Capitalize on Value-Added Services

• Sarbanes-Oxley Next Phase of Compliance
• Client Data and Process Analysis
• Engagement Reporting (status briefings and
  reports)
• Claims Management/Reporting
• Management Report
• Ad Hoc Requests
• Software Solutions

Accounts Payable Insight
19
Improvements Made at ADT

• Rewrote policy and procedure to address invoice
  conventioning problem
• Developed an internal audit group to identify and
  recover duplicate and erroneous payments
• Implemented an Escheatment Software to address
  uncashed checks
• Implemented electronic payment of invoices
  yielding significant cost savings
• Rolled out desktop viewing and imaging to
  corporate and field offices

20
What Should Your Audit Firm Commit To?

• Superior service maximizing total recoveries with
  minimal disruption
• High claim quality
• Excellent supplier (vendors and
  contractors/subcontractors) relations always
  being respectful, knowing sensitivities
• Audit Process, developed in conjunction with you,
  the client
• Timely completion of the audit
• Effective and efficient communications
• Help client to achieve Best Practices, Six
  Sigma