Authored by Amanda Kirsch, CIA | Manager, Contract Compliance Audit
In 2023, procurement leaders face the critical task of achieving cost savings and increased supplier transparency amidst hyperinflation, consumer demands for ethical sourcing, and stricter data security regulations. 60% of business leaders attest that a lack of transparency between their finance and procurement functions and their suppliers poses a significant risk. Yet, despite these mounting pressures, 24% admit that they do not have an effective framework to evaluate supplier practices and relationships.
For most organizations, supplier relationships are entered into with structured, thoroughly planned contracts that are intently reviewed by both parties to ensure acceptable terms. However, without a proper monitoring process, compliance can never be guaranteed. As a result, discrepancies between the contract and the actual activities between the parties may emerge. This can lead to process inefficiencies, overbilling, increased costs, and additional risks. A recent study found that organizations lose up to 9% of annual revenue due to poor contract management.
Periodic third-party contract compliance audits are a best practice to combat these challenges and increase supplier transparency. Working with an experienced contract compliance audit partner will:
1. Identify Non-Compliance
During a contract audit, an extensive examination of the suppliers’ billing records and processes is conducted, providing a deeper level of detail that is not typically available to clients during the normal course of business. The audit reveals areas where current processes or pricing differ from the contract terms and often uncovers overcharges and non-compliance that have gone undetected by either party. This provides opportunities to recover overbilling, identify savings opportunities, and enhance controls to ensure future transactions and activities between the parties align with the contract.
2. Provide an Unbiased View of the Relationship
Both clients and suppliers may struggle to identify suboptimal processes due to their intimate familiarity with the business relationship. Familiarity can lead to incorrect assumptions about agreements and compliance that are easily overlooked. Third-party contract compliance audits offer an unbiased view of the business relationship, highlighting misalignment between processes and contracts and identifying opportunities to improve contract language. This helps ensure the contract is in harmony with the supplier relationship and leads to more predictable business outcomes.
3. Clarify Ambiguous or Undefined Contract Terms
Unclear or undefined contract terms create confusion and increase the risk of misunderstandings, adding stress within the relationship and detracting focus from value-generating activities. Contract compliance audits identify areas of ambiguity within a contract and offer recommendations to clarify the terms. Establishing clarity and consistency between the business and contracts benefits all parties, leading to more transparent, sustainable relationships. Rather than focusing time and effort on disputes, the parties can focus their attention on generating value.
Periodic third-party contract compliance audits are a best practice and a necessary component of an effective supplier management program. When executed by an experienced audit team, contract compliance audits can recover significant overcharges, identify cost savings, establish a more transparent supplier network, and build processes for long-term success without disrupting operations.
Connect with one of our contract compliance audit professionals to learn how our team can help you generate cost savings while building stronger supplier relationships.