Suppliers under scrutiny from retailer audit firms

With more than $1 billion to gain annually, suppliers say the largest retailers and their third party audit firms have stepped up the bounty hunt in the form of post payment and cost-recovery audits.

That is money sought out by firms like Connolly, PRGX and Apex Analytix who work as third party auditors on behalf of the largest retailers, including Wal-Mart and Best Buy. These firms scour the payment records between retailers and their suppliers looking for pricing errors, freight foul-ups and other opportunities for lost revenue.

Boyd Evert and his team at Harvest Revenue Group in Bentonville are standing in the opposite corner on behalf of suppliers helping them handle and prevent future audit claims that take away from their productivity and further shrink their margins.

Some suppliers who were averaging 8 to 10 claims a month, say they have recently been inundated with around 100 claims some months as the tenacity has been elevated from third party auditors working on behalf of multiple retailers, according to Evert.

Evert said Harvest’s top line revenue grew 300% in 2012, the firm’s second year of business, because suppliers are seeing record claims. He and the half dozen or so auditors at his “watchdog” firm each spent time on the flip side of the business working for third party auditors before launching Harvest Revenue Group in March 2010.

Rob Farinholt, business development director with CaseStack, says he refers suppliers facing audit claims to Harvest. He said retailers have three levels of scrutiny – multiple auditors, internal and third party – combing through past payment records looking for possible claims to collect on a year round basis.

“The suppliers need an ally when it comes to refuting claims and helping them find lost revenue on their side of the transaction,” Farinholt said.

Evert said that is exactly why he established Harvest nearly three years ago. He said didn’t know of any firms working on behalf of the suppliers getting hit with claims.

THE HUNT
Evert describes an atmosphere of aggressive bounty hunting that has escalated as the economy tightened and retailers discovered profit centers built into their own payment systems every time a claim against a supplier is written and won.

“Third party auditors also work on a contingency basis. They don’t get paid unless they recover money for the retailer, so they are very creative in finding new claims to file,” Evert said.

He said the margin of recovery is roughly one-tenth to two-tenths of 1% of total sales. For a company like Wal-Mart that’s a potential of $500 million annually in audit recoveries. Best Buy in comparison has the potential for $57 million annually for audit recoveries, resulting from errors in pricing, promotions and shipping.

Across the entire retail channel, Evert says there is $1 billion to $2 billion in errors that suppliers and retailers are trying to recover for themselves with the help of third party auditors and a counter effort from suppliers using companies like the Harvest Revenue Group.

Evert said some suppliers in recent years have budgeted in the cost of recovery audits when setting their prices with retailers, in essence passing along those charges to the consumer in the end.

He doesn’t expect retailers to rein in the bounty hunters simply because there is no incentive for then do to so. In fact Evert said the largest companies like Wal-Mart often use multiple third party auditing firms which increases the intensity and competition to write more audit claims.

With an average retail margin of 10%, a retailer would need to generate sales of $10 million to net $1 million. But Evert says they can employ third party auditors to scour their payment records on a contingency basis and recover that and more with no cash outlay.

He said it’s only fitting that suppliers have someone helping them mount a suitable defense.

PLAYING DEFENSE
Harvest works with suppliers in the electronics, toy, food, small appliance and health and beauty aids sectors. Evert said suppliers with products getting heavy promotions and lots of price changes are among the most vulnerable for traditional post payment audit claims.

He said the ambiguous nature of sales negotiations between suppliers and buyers lends itself to audit vulnerability.

He gave this fictitious example of an audit claim: “Let’s say a shampoo supplier comes to Wal-Mart with a promotional event for the first quarter, but the retailer opts out because it’s already doing another health and beauty aid promo. But Walgreen’s decides to do the promotion with that supplier. Because Walmart matches prices, it sells a large number of shampoo at the lower price. Several months later the third party auditor notices Wal-Mart sold more product at the lower price, but didn’t get the promo price from the supplier. So it files a post payment claim to recover the lost margin. Harvest would make Wal-Mart prove it agreed to the promo by producing a contract.”

Evert said audit claims often hit suppliers at inopportune times, and forces them to look backward, taking their focus of future productivity. There is roughly a two-year window for claims to be filed, which can seem like ages in the fast paced world of retail sales negotiations which are always forward looking, he explained.

The lead time to respond to the audits had been three to four months, but Evert said he’s seeing retailers shorten that time to between 30 and 60 days, which is putting more pressure on suppliers with the most claims.

Jami Dennis of Rapid Training Solutions, consults with suppliers of all sizes and says some retailers have begun to automatically debit the supplier accounts for these audit claims after just 30 days, which can be particularly troubling for smaller vendors with limited products and cash flow.

Dan Batson, president of NWA Retail Link User Group, said Harvest spoke at the group’s recent meeting because heightened post payment audit claims were an issue being felt by many suppliers across the entire retail chain.

Batson said the third party auditors at some firms have become very aggressive, to the point of rewriting the rules that retailers and suppliers are supposed to follow with regard to price disclosure.

“I felt so strongly about some of these audit practices that my colleagues around the industry were facing that I took a complaint to Wal-Mart’s ethics board,” Batson said. “I felt Wal-Mart needed to know about some of the practices auditors were using to drum up claims, since those third parties do work on the retailer’s behalf.”

A Walmart spokesman said Wednesday afternoon (Jan. 23) he was investigating the matter and could not yet comment.

Batson agreed the problem is growing as competition between third party auditors escalates. He said Harvest Revenue provides a defense against claims and also works actively to educate suppliers on ways to prevent and reduce future claims.

“We are talking about billions of dollars of claims annually across the whole retail channel,” he said. “This is a big business.”

Nate Sklaroff, director of sales at Harvest, said the firm actively holds classes and group training for suppliers wanting to learn how to reduce their risk for audit claims that result from “creative interpretation” from poorly worded emails or documented sale contracts.

“Often times suppliers need to give more specific details in email exchanges because third party auditors scan for keywords like ‘rollback’ ‘promo’ or ‘ASAP’ because of the immediate time element,” Sklaroff said.

CLAIM CULTURE

Evert says there is a claim culture among the third party auditors and they routinely share information about paid claims which sets a precedent for other retailers to follow with future audits of a similar nature.

Connolly has an office in Bentonville, but the firm did not respond to several phone and email requests for comment.

Steve Yurko, CEO of Apex Analytix noted in a December newsletter: “Innovation and creativity in recovery audit services and technology are at an all-time high. There is aggressive audit and technology innovation in an expanded range of spend categories, including media/advertising, waste removal, mobile/fixed telecommunications, utilities, freight, health care, real estate, global taxation and more.”

He touted innovations in audit techniques, which include uncovering and digitizing buy-sell agreements embedded in emails. As well as auditing the “digital supply chain” created by mobile technology.

Yurko said in the trade newsletter found on the Apex website, “As buyers and sellers get more creative in the ways transactions are structured, leading shared services executives are demanding that their recovery audit partners raise new questions, explore new possibilities, and innovate.”

Evert says his client training and services are designed to give suppliers the tools they need to minimize the disruption that post payment audits create.

“We not only fight claims, but we also help clients recover money they are owed in the process. Our largest score was in excess of $1 million that a retailer had to refund,” Evert said.