What are Post-Audit Deductions?
Post-Audit Deductions are the missed discounts, trade deals, double payments, and incorrect pricing that contingency (commission) post-auditors discover when they review old payment transactions.
These are frequently up to three years old, by which time your records may not be so accessible. While the money may be big, the age, number of line items, and complex nature may result in write-offs because you don’t have the systems or staff to address them.
Why are Post-Audit Deductions So Important?
Why is this so important? Up to 50% of post audits can be completely wrong or excessive, representing hundreds of thousands or even millions of dollars every year.
Auditor errors result from misinterpretation of terms or promotional deals, or even accidental double or even triple-dipping. For example, this can include deducting for allowances that were deducted previously and that you found invalid.
Even deductions that were previously repaid to you can get deducted again a couple of years later.
Keep in mind that auditors are generally don’t have easy access to all the data they should be using. For example, they may be unable to verify that 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. If you don’t get to it quickly, they deduct it. Post Audits are a multi-billion-dollar business for which manufacturers are paying for the tab.
10 Best Practices for Managing Post Audit Claims
1. Publish a Post Audit Policy
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 commissioned post-auditors so that your policies are on the record. Click the link for an example of a post-audit claims policy statement.
- Decide how far back you will accept an audit claim. Many retailers audit 24 months or later, which makes it almost impossible to research the claims in the time allowed.
- Require all claims to be fully supported with documentation, including invoices and trade deals.
- Make sure all your promotional deals are clearly documented (quantities, pricing, expiration periods).
- Insist on at least a 90-day investigation grace period for your research before the deduction. Don’t accept a period that you can’t live with.
- Email the signed policy statement first to the customer executive management and buyer and later to the auditor.
2. Keep Your Trade Secrets, Secret
Advise the auditors that your marketing and promotional plans, pricing, and operational policies are confidential trade secrets. Otherwise, they may share information with other auditors.
The big post-audit firms work for a number of your customers, so be alert for auditor data sharing. Your confidential trade programs may get applied to the wrong markets or customers.
3. Simplify Trade Promotion Deal Formats
Standardize the templates and clarify your sales and promotion offer sheets. Remove any gray areas open for misinterpretation, such as promotions based on ship date, order date, and receipt date. It’s very important to get your sales and marketing departments involved to tighten internal control of sales agreements.
4. Speed Deduction Management Response
You don’t want to 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. Insist they not deduct until that is complete.
Consider a dedicated person or team to handle post-audit claims. This will help them get addressed as a priority so they will be handled before the retailer’s short window for research closes. Address post audits quickly.
Develop research procedures and workflows, and track deduction KPIs. Also, establish improvement targets by deduction code to spot trends and abuse.
Reject incompletely documented claims out-of-hand and explain that your corporate policy and Sarbanes Oxley prevent you from accepting undocumented charges.
5. Establish a Document Management System
You may receive post-audit claims two years after the fact and need to quickly access invoices, pricing, and promotional deal sheets. Use promotional funds and deduction tracking to strengthen the audit trail.
An automated system can track all claims and deductions by invoice with details on the resolution. That way, you can always determine if a post-audit charge is a double (or even triple) deduction.
Reductions in post-audits deduction losses may pay for a new system.
6. Trade promotion and deduction management software
Use software that will link and store all the relevant information and documents for every transaction. These include invoices, sales data, deal sheets, accrual balances, and access to prior deductions. This will prevent you from having to dig around in different systems and files to research the deduction.
Having the deal accrual balances and prior claim/deduction histories at hand prevents double and triple-dipping. You can improve your regular deduction management KPIs, aside from post-audits.
7. Establish a Post-Audit Contact Database and Customer Involvement
Knowing who to call (post-auditor and customer) will drastically reduce resolution time and enable you to cut through excessive red tape. The post-auditor (as well as your customer) will try to isolate your communications to the auditor alone. Don’t fall for it. If you are not getting a fair shake, go to customer management.
8. Identify Root Causes
You may see certain patterns which need further exploration. For example, if trade deals are consistently misinterpreted, you’ll likely find out that the deal sheets are not clear. If you ship FOB Origin, and the customer deducts freight charges, you should review the purchase agreements to make sure they agree with your policies.
9. Settlements will Hurt in the Long Run
Settlements and write-offs are tempting since a single claim can cover one hundred line items. Nevertheless, insist that each claim be documented, research them, and demand repayment for those that are invalid. Taking the easy way out will encourage more post-audit deductions in gray areas subject to misinterpretation.
10. Be Consistent in Enforcing Your Policies
The word will quickly spread among post auditors that your company is not a pushover. You will get a reputation as a principled company that insists on being treated fairly.
And, as always, please contact us if you want more information on this complex subject.
