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Don’t Let the Dirty Little Secrets of Freight Audit and Payment Impact You

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5 Secrets Freight Audit and Payment Providers Aren’t Telling You

The past year has exposed firms who acted with fraudulent behavior while providing freight audit and payment services. Sadly, more organizations may follow. But warning signs present themselves well before the house of cards falls. Shippers just need to look and conduct some due diligence to determine if they are at risk; the signposts to such circumstances are often identifiable if you know where to look.

Whether you choose to audit internally or elect to outsource this function, there are some little secrets you should be aware of to avoid risk.

1. They say they provide a comprehensive audit, but they don’t.

Consider the complexity of the parcel contract and how the carriers arrive at a net rate.

Start with the base rate minus discount. Now consider the applicable assessorial charges, of which there are dozens. Don’t forget to apply the fuel surcharge (FSC) and properly account for which assessorials the FSC applies to from those it does not. Keep in mind that the FSC periodically changes, so be sure your system is up-to-date.

Properly rating a shipment is a difficult enough task for the carrier, few shippers have the tools or capacity to accurately confirm rates. Many will manually do a random sample or attempt a rate audit but will miss surcharges, adjustments, and conversions. This is one reason why the freight audit and payment industry exists.

But are all auditors equal? No. Some will just conduct a spot check or random sample. Others specialize in a specific mode. The key to overcoming this hidden secret is to understand how they go about analyzing your invoices and make sure it is a comprehensive methodology. 

2. They use your money to make their money. 

Many of the old fashion auditors set up a system where they would receive funds from the shipper in advance of issuing a check for payment to the carrier. From the date a shipper’s funds are deposited into the auditor’s account until the date the check to the carrier clears for payment, the interest on those funds was a prime source of revenue for that auditor.

In today’s world of near zero interest rates and electronic fund transfers, if an auditor charges you little for auditing services and looks to make their money on the float in payment, something is amiss.

Understand the different between “audit to pay” versus “audit and pay” service options. In the “audit to pay” option, the auditor provides comprehensive auditing services and gives you an “authorized to pay” or “OK to pay report.” The funds are always kept in your own account, and you issue payment directly to your carrier(s). In the “and pay” model, the auditor notifies you of the amounts you owe and you transfer funds into an account from which the auditor will disburse payment to the carrier(s). There are situations, for example, if you have a large number of carriers to manage, where the “and pay” option makes great sense.

3. They mix your money with other clients’ money. 

Nothing may be more important than doing your due diligence on the internal controls and processes of your auditor. Ensure that any funds you advance to an audit firm are maintained in a secure account, separate from the funds of the firm’s other clients. If you find an auditor pooling multiple client funds into a single account from which they manage payment to carriers, the probability exists that one shipper’s funds are being used to pay another shipper’s carriers. This situation is what ultimately led to a few firms in the industry going under and being sued by clients who were left footing bills for which they had technically paid. 

4. There is no industry watchdog. 

This is not a regulated industry. There are few watchdog groups or associations that report on adherence to acceptable business standards. In addition, many of the participants are privately owned firms, making it more difficult for you to obtain the information typically available for a publicly owned company.

One source for accreditation is the Statement on Standards for Attestation Engagements, known as SSAE 16. In this evaluation, service organizations have their audit, risk, and control processes assessed by an independent party. Reviewing the results of this evaluation will help you determine the strength of a service provider’s systems and controls.

Given the numerous auditing firms that are private companies, financial records are often not readily available. A red flag should go up when an auditing services provider refuses to provide certified, audited financial statements to a shipper’s designated financial professional for review.

5. The people who really deserve your money may not get it.

Oftentimes, the best source to find a pending problem, particularly when operating in an “audit and pay” environment, is a shipper’s carrier base. When calls start coming in from multiple carriers that they are not being paid within the terms of the agreement, and a shipper has advanced funds to the audit and payment company, immediate action must be taken.

Conclusion

Importantly, these dirty little secrets are not limited to outsourced auditors. Many of them can also happen with an internal audit and payment function that does not receive proper oversight. While most shippers leverage professional, ethical companies and teams to oversee this critical business function, like any business area that involves significant dollar transactions, due diligence is imperative. Let enVista’s transportation experts help you improve global freight visibility, increase operational and financial controls and reduce transportation expense with leading freight audit and payment services. 

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