What is a Post-Audit Deduction?
Accounts payable post-auditors check closed transactions to find missed discounts, double payments, and incorrect pricing charged. However, in consumer products and retail, the real money is in trade promotion deals and process violations for which the auditor believes were not charged back (“bill-backs”) when the invoice was paid. These third-party auditors receive a sizable commission of what they bill back to you.
Why is this so important? Not surprisingly, up to 50% (or higher) of post audits can be completely wrong or excessive, with errors due to auditor eagerness to make a buck, misinterpretation of promotional deals or terms, or double or even triple-dipping*. Keep in mind that the auditor is generally not dealing with easy access to all the data they should be using. For example, have they verified if the claimed post-audit claim was previously deducted or disallowed as invalid?
In any event, it’s up to you to disprove a post-audit claim, and if you don’t get to it quickly, they deduct it. Post Audits are a multi-billion-dollar business and, if you are a manufacturer, you are paying for the tab.
*”Double or triple dipping dipping” can include deducting for allowances that were deducted before as well as deductions that were previously found to be invalid and were repaid to you and now deducted again a couple of years later.
Best Practices for Managing Post Audit Claims
Establish a Post Audit Policy
Having a well-crafted Post Audit Policy is your first line of defense. Have your CEO sign it and email it to your customers and to the auditors so you are on the record. Here is an example of a post-audit claims policy statement.
- Decide on how far back an audit claim will be accepted by you. Many retailers audit 24 months or more, which makes it almost impossible to research the claims in the time allowed.
- Require that all claims be fully supported with documentation: invoices, trade deals, etc. Make sure that every promotional deal is documented (quantities, pricing, expiration periods, etc.,)
- Insist on at least a 90-day investigation Grace Period for your research prior to the post-audit deduction. Do not accept a time period you can not live with.
- Email the policy statement, signed by your CEO, to the customer executive management and the buyer, and later to the auditor as well when you get to that point.
Your Trade Secrets
- Your marketing and promotional plans, pricing, and operational policies are confidential trade secrets, so you need to advise the auditors of that. Otherwise, they may share information with other auditors, to your detriment.
- The biggest post-audit firms work for a number of your customers so be alert for auditor data sharing, in which case your confidential trade programs get misapplied to the wrong markets or customers.
Simplify Trade Promotion Deal Formats
Standardize the templates and clarify your sales and promotion offer sheets, removing any gray areas open for misinterpretation (i.e. promotions based on ship date, order date, receipt date, or a combination). It is very important to get your sales and marketing departments involved to tighten internal control of sales agreements.
Improve internal processes
- You will quickly run out of the grace period and end up writing off the charges. On receipt of claims, send the auditor a letter with your policy, underlining the Investigation Grace Period and insisting they not deduct until that is complete.
- Consider a dedicated person or team for post-audit claims, as they must be addressed as a priority since the retailer usually allows only a short window for research prior to the deduction.
- You must address post audits quickly. Develop research procedures, workflow, track deduction KPIs, and establish improvement targets by deduction code to spot trends and abuse.
Establish a document management system
You need to quickly access invoicing, pricing, and promotional deal sheets when you receive post-audit claims two years after the fact. Use promotional funds and deduction tracking to strengthen the audit trail. An automated deduction management system should track all claims and deductions by invoice with details on resolution so that you can always – even three years later – determine if a post-audit charge is a double (or even triple) deduction.
- Use software that will link and store all the relevant information and documents for every transaction (invoices and sales data, deal sheets, accrual balances, prior deductions, etc.) so you don’t need to dig around in different systems and files for research.
- By having the deal accrual balances and prior claim/deduction histories, you can prevent double and triple-dipping. This will also enable you to significantly improve your regular deduction management KPIs, aside from post-audits.
Reject Undocumented Claims
Explain to the auditor and retailer that by your corporate policy, and in compliance with Sarbanes Oxley, the company is not permitted to accept undocumentedcharges.
Establish a post-auditor and customer contact database
Knowing who to call will drastically reduce resolution time, and enable you to cut through excessive red tape.
Identify Root Causes
Make sure you use your process to uncover the reasons behind post-audit deductions, instead of just disposing of them. Knowing root causes will flush out the systemic problems in your processes.
Settlements or a write-off can be tempting since a single claim can cover a hundred line items. Nevertheless, insist that each claim be documented, research them, and demand repayment for those that are invalid. Takin the easy way out will encourage more post-audit deductions, in gray areas subject to misinterpretation.
Both your customer and the post-auditor will try to isolate your communications to the auditor only. Don’t fall for it. If you are not getting a fair shake, go to customer management.
The word will quickly spread among post auditors that your company is not a pushover, but is a principled company that insists on being treated fairly.
And, as always, please contact us if you want more information on this complex subject.