Importance of a Contract Compliance Audit

The complexity of today’s customized goods and services contracts makes it extremely difficult for suppliers to bill accurately and even more difficult for companies to verify the accuracy of billing prior to payment.

More time is typically spent on the negotiation of goods and services agreements, than on the verification of recurring billing thereafter. Invoicing errors can be significant, costing companies large sums of money over the lifetime of an agreement.

Auditing a contract retrospectively is an essential part of the whole contract agreement. A successful contract compliance audit should include a review to determine if a contractor is executing on the terms of the agreement, such as delivering services at the agreed cost and in the most suitable manner.

While it does take time to conduct, an audit can help you save money in the long run by reducing risk and improving processes and controls. Below are some details you should consider before commencing an audit.

1. Scope

Are you reviewing the entirety of the contract?
Are there a few areas with which you’re concerned?

In a perfect world, you should hire external consultants to conduct an audit. These are specialists who have seen many similar contracts before and can help you learn from the expertise they have gained over time in the world of contract compliance audits. An outside perspective can highlight whether you have agreed any terms that your suppliers will be unable or unlikely to complete.

If you’re unable to hire external consultants, it’s not impossible to consider the scope of the audit internally. Base a contract on your previous experiences with other suppliers. If there’s a particular relationship that works smoothly, put into words what it is that makes the process streamlined. During your audit, identify areas of potential concern and see where you have leverage to enforce them within the initial contract.

2. Objectives

Once you have determined the sections of the contract that you want to review (if not the entire contract) it is essential to identify your objectives for the review.

There are many benefits to an audit, including but not limited to;

Recovering costs
Improving processes
Deterring fraudulent activity and managing risk.

In order to accomplish this, you need to identify specific areas of exposure and define your objectives for testing against your current contract.

3. Timing

Audits should be initiated when you have strong leverage to change processes or recover overpayments. This could be influenced by many factors, depending on your relationship with your supplier.

There are many benefits to an audit, including but not limited to;

Are you releasing a new product that your contractor wants to sell?
Do you have another contract review set in the near future?
Does your supplier have the means to repay incorrect overpayments?

Whatever your reasoning, think practically about the point within a given financial quarter when you have the upper hand, and execute the audit accordingly.

4. Partnership

A contract compliance audit should not be overly hostile or contentious.

Instead, put it within the frame of partnership when presenting it to your supplier.

You want to find out when and where your supplier isn’t delivering, but you still want to maintain a professional relationship and continue doing business together. Present it as a chance to make sure that processes are being fulfilled from both sides as was initially agreed.

5. Future

In the course of and after your contract compliance audit, keep in mind what worked well and what didn’t. It is important to anticipate what you may be able to fix or run more smoothly in advance of your next audit, be it with the same supplier or another.

Regular Reporting Processes

Many of the largest financial mishaps we have identified over the years have occurred as result of reconciliations (for both time and third-party costs) not having been done accurately or at all. Companies that put regular reporting processes in place are able to keep a close eye on the numbers on a day-to-day basis and can often identify discrepancies soon after they have happened.

Audit Strategy

A structured audit strategy ensures that suppliers are aware of both the ongoing reporting and audit system with regular reporting in place, the suppliers with more instances of errors or unusual trends in the numbers during the period are the ones that are targeted most carefully.

Advise Suppliers

Suppliers take greater care of the financial side of the account if they know their work is going to be checked by an independent specialist.

With these ongoing steps in place, companies can be confident that their supplier contracts are well-managed and controlled. Suppliers themselves recognise when a client is taking an interest in the contract and in most instances it makes the ongoing management of the contract easier too. Eg: If a discrepancy is identified on the account, the problem can be resolved quickly, rather than allow it to fester and become a bigger issue later on.

For some expert help in identifying areas where your suppliers may be misreporting figures or contributing to overpayments contact Rockford Associates for a confidential and no obligation initial consultation.