Even small organizations may be hundreds or thousands of active contracts at any one time. It is critical that regular contract compliance audits are performed to protect your business from unnecessary risk.
A contract compliance audit can help you discover systemic problems that are costing you money in non-compliance penalties. It can also reveal the overpayment of fees.
Performing a contract compliance audit doesn’t have to be onerous. If you follow a few basic principles, you can easily conduct a thorough audit without disrupting your operations.
How Often Should You Audit?
Many companies are unsure of how often they should be conducting contract compliance audits. The best practice is to have at least one audit a year. If you have a significant number of contracts, you may want to conduct a quarterly or semi-annual audit.
The first contract compliance audit is always the most difficult. But, once you have a system and a set of operating procedures in place, future audits will be smoother and faster.
Setting the Scope of the Audit
One of the first things you need to do is set the scope of the audit. The scope of the audit is the amount of time you will devote to the review and the number of documents that you will review.
While you could choose to review every single contract, that is not the point of an audit. Instead, you want a representative sample of the agreements. This will show if there are systemic issues and give you a general idea of how well your entire portfolio of contracts is performing.
Objectives of the Audit
Many companies confuse the concept of audit objectives with the scope of the audit. But, these are not related at all.
The objectives of your audit are the guiding goals for the process. Objectives could be to examine contracts for cost overruns or late deliveries. Another objective could be to make sure the company is not overpaying non-compliance penalties. Sometimes you may want to see if your partners are fulfilling their obligations.
The objective of an audit should not be to find someone in your organization to blame for issues. It should be to evaluate the contracts against some standard.
Not every audit has to have the same objectives.
If you are going to have a successful audit, you need to encourage cooperation and collaboration with every part of the company.
The audit team will need to talk with managers and employees to fully evaluate the contracts they are analyzing. This is one of the reasons the objectives of the audit need to be precise. It will help focus the examination, and it will reassure employees that they are not under investigation.
Audits can cause organizational anxiety. The audit team and senior management need to communicate to everyone that it isn’t a fault-finding effort. They need to encourage collaboration and explain the audit is just to make sure the company is operating as efficiently as possible.
Analyzing Audit Results
One of the biggest mistakes a company can make is not doing anything with the audit results. After an audit has been conducted, the management team needs to do three things:
- Create an action plan based on the results
- Complete the actions in the plan
- Revisit the audit results and action plan after the completion of the actions
An audit is a tool for discovering hidden issues. But a contract compliance audit is a waste of time if the executive team fails to take any action based on the findings.