Academic journal article The Journal of Government Financial Management

How Audit Technology Can Help Federal Agencies Conquer the Improper Payments Conundrum

Academic journal article The Journal of Government Financial Management

How Audit Technology Can Help Federal Agencies Conquer the Improper Payments Conundrum

Article excerpt

The Office of Management and Budget (OMB) reported that the federal government loses more than $100 billion annually through improper payments to individuals, organizations and contractors.1

Numbers this large certainly warrant attention, especially in light of soaring deficits and shrinking revenues.

Congress has taken steps to elevate and address the issue with the Improper Payments Elimination and Recovery Act (IPERA) of 20102 and the recently passed IPERA Improvement Act of 2012.3 These laws formalize a number of rigorous financial controls and processes, including requirements for routine improper payment recapture audits to find and recover payments issued in error.

Many agencies have responded to IPERA by contracting with audit service companies that are paid a small percentage of any improper payments they recover. In order to maximize their earnings, these firms use sophisticated software programs they've developed to analyze data and quickly spot anomalies that warrant a closer look - such as duplicate payments, credit memos entered incorrectly, sales tax errors, incorrect costs and missed discounts. They are able to accelerate the audit process in dramatic ways and produce greater recoveries in a much shorter period of time.

The analytics used by auditors have been carefully honed over the years to reflect the experiences gained while working with a wide variety of clients, systems and payment data. As a result, today's audit software tools represent the collective intelligence of industry experts who know how to follow a data trail and isolate improper payments in places many would never consider. This technology may be used by any audit practitioner, regardless of skill or experience, in order to uncover potential problems and quickly reverse a pending payment.

Some of the software created by audit firms has become commercially available in recent years, and is now helping some of the world's largest corporations protect their hardearned revenues. Examples include: solutions available from APEX Analytix, AP Recovery, Fiscal Technologies and Oversight Systems, to name a few. Perhaps the time has come for forward-looking government finance teams to follow the lead of their commercial counterparts and leverage the same types of improper payment audit technology.

Benefits exist for agencies that adopt audit software. Taking a technology-based approach can help an organization comply with IPERA in a less costly and more efficient manner by conducting audits internally and reducing (or eliminating) the fees paid to external audit providers. Most importantly, the same technology can be used to prevent overpayments from happening in the first place - upending today's unfortunate 'pay and chase' status quo.

The U.S. Department of Housing and Urban Development (HUD), for example, achieved a historically low rate of 2.9 percent in overpayments by using data-matching software to compare payees against a database of approved recipients. The use of technology helped the agency trim its improper payments from $3.43 billion in 2002, to just $959 million in 2011 - a decrease of nearly 75 percent.

On the surface, it may appear that there is a trade-off between improper payment prevention initiatives, and the requirements of the Prompt Payment Act. But in reality, there is little 'overhead' in terms of time expended. Audit software typically performs an analysis overnight to flag potential problems among payments entered that day. Accounts payable reviews a report the next morning and either authorizes or halts the payments in question. At most, an agency will delay a select few payments by a single day - producing a potentially dramatic impact on accuracy, with a minimal impact on payment interval.

How Audit Software Works

The significant benefit of using software to audit disbursements becomes crystal clear when you understand how the process works. As a first step, simple extraction utilities are used to pull data from the various payment platforms an organization uses - whether they are home-grown solutions or a mix of commercially available P-Card systems and payment platforms. …

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