Note: This article deals specifically with business style recovery audits. This is a different procedure than personal audits levied down by the Internal Revenue Service (IRS). For information on that topic, please visit the link provided in the resource box.

Compared to a personal audit, where an external entity (the IRS) digs through the deepest details of one’s life hoping to find a number out of place, recovery auditing is typically a form of internal control where a business or entity digs through their own records looking for discrepancies, such as overpayments, fraud, et al. Simply put, the entity is searching for money that left the business that should not have and can be recovered down the road (preferably sooner than later).

Recovery audits are not always easy processes. They can take time, effort, and cost money with no guarantee of any return on the investment. So why do one? Obviously, the benefits can often outweigh the risks. Here is a look at some of the benefits that might be reaped:

* Financially – This is the most obvious benefit of a recovery audit. Even mid-size businesses (let alone large organizations and major corporations) are involved in thousands of transactions every year. It is easy for a small percentage of money to slip through the cracks, be involved in an overpayment, or be lost to fraud from inside or outside the company. If it is much more than a small percentage, that is likely indicative of greater flaws in the overall organization and not just a problem in the accounting department. However, even if it is just a small percentage, this can add up when revenues and costs are high. For example, if a company loses just 1/10 of 1% (0.1%) to accounting errors per year – if the money involved in transactions is $50 million (not outlandish for a mid-size firm), then we are still talking about $50,000 in possible recovery. In this economy, businesses can hire another quality employee with that money (obviously many more with the same percentages is transaction dollars are much higher).

* Operations – Audits (of any kind) offer good opportunities to learn about one’s own business operations. In day-to-day work, it is easy to get buried in the upcoming activities and forget to take a look back to find out what is working and what is not. Recovery audits specifically offer the opportunity to see where money may be leaking out of the company where it should not be. Not only does one allow the possibility of recovering these funds, but it also shows why the leaks occur and need to be plugged to prevent repeating them in the future.

* Checks & Balances – It may sound rather myopic, but the fact of the matter is that the average company loses a large sum of money to incompetent and/or unethical behavior every year. Regular recovery audits help serve as checks and balances to make sure that this behavior gets noticed when it does occur (preferably soon after). There is also the psychological factor that when employees know that mistakes or fraud will be caught and traced back to them, they tend to put a greater focus on their work and/or behave ethically. This isn’t a foolproof system, but it is an added benefit.

Author Bio: By Felix Chesterfield

To learn more about personal audits (mentioned above), please visit the IRS.
For information about recovery audit , please visit the link provided.

Category: Business Management
Keywords: Recovery audit, audit software, accounting