A contract compliance audit is a tool that accounting and legal professionals rely on to show them where company processes can be improved, to reduce costs, increase profit, and lower risk. Many companies engage contract compliance audits as a regular part of business. By doing this, they stay more profitable, keep their margins higher, and their risk lower. Be on guard If your company has not conducted a contract compliance audit recently. Here is how your team can perform one and what your business can expect to achieve by going through the audit.
What Is a Contract Compliance Audit
A contract compliance audit is a series of reviews by accountants, attorneys, or other professionals. Together, they ensure that the language of the contract accurately reflects the interests of the company. Moreover, they check that it protects both parties’ interests. The audit ensures that the contract explicitly states the relationship between the parties. That including the duties, payment structure, and any potential risks.
The contract compliance audit reviews and makes any needed changes to the contract language and processes. A contract compliance audit helps a company gain and maintain other organizations’ trust by openly correctly any weaknesses and errors. Companies with the highest level of transparency periodically conduct contract compliance audits.
Who Uses Contract Compliance Audits
Sometimes companies will conduct their contract compliance audits, but usually, they will hire a third party to complete the audit. The person they hire is a contract auditor and needs to have a minimum of a Bachelor’s degree in accounting or finance and may also be a CPA (Certified Public Accountant). The contract auditor may work in conjunction with an attorney or a legal team.
A contract auditor may audit all or some of the company’s contracts and make recommendations as to how procedures and operations may improve within the contract. Auditors, or those acting as auditors, need to be tactful and empathetic, as they may interview employees and work under pressure with multiple levels of management. The auditor plays a crucial role within the company, helping them know if their internal controls are functioning, and if not, working on a plan to implement improved controls.
How to Implement a Contract Compliance Audit
- Decide if you will handle the audit internally or if you will contract the audit to a third party. If you have the audit completed internally, you may wish to allocate several accountants, depending on the extent of the audit, as well as a lawyer, if you have one available.
- How big is your contract compliance audit going to be? Are you going to review every contract or only certain ones? Knowing the extent of your audit will help you know how large of a team to assemble and what work you will need to reassign during the audit.
- Once you have your team, decide what you want to hone in on during the contract compliance audit. By focusing the audit, you will have a better idea of how long it will take. You may want to concentrate on improving processes, cutting costs, recouping losses, reducing risks, protecting the company from fraud, or any combination of these.
- Audit your vendors. Make sure that you are getting what the contract states.
- Once the auditor or team decides on any changes to contracts, have a meeting with anyone who uses the contracts and explain the changes.
- Make the changes to contract templates and ensure that all employees use the new version.
- Create a process so that audits and maintenance is an ongoing, daily part of business. By doing this, clerical errors have a better chance of being caught sooner and not being redone throughout systems.
Ways in Which a Contract Compliance Audit Can Help Your Business
- A contract compliance audit can ensure that your company and its vendors are in conformity with every agreed-upon term. Think of it a business relationship check-up. Completing these checks are especially important for multi-year contracts that you may not review regularly. An audit can reduce your company’s risk of fraud. That’s even when the vendor does not engage in the same auditing practices.
- Large businesses with many offices tend to have this problem. Some branches of the company may utilize a different version of the same contract without each other’s knowledge. The audit a time for everyone to communicate, decide which contracts to use, and which no longer reflect the organization.
- Your company must conduct periodic contract compliance audits. Otherwise, it will negatively impact the company’s profitably and ROI (Return on Investment). That’s because you may not know exactly how much money is uncollected in vendor accounts.
- To maintain trust and transparency, and comply with the terms of its contract, the same goes for the suppliers. The company may have outstanding payments it needs to make.
- If vendors invoice the company and you wish to dispute them, conducting a contract compliance audit will show if your firm owes the funds, as well as give you a baseline of comparison to see if a vendor’s pricing is competitive.
- A contract compliance audit helps new employees become acquainted with company contracts. If your business underwent a merger and acquisition, a contract compliance audit could assist your team in deciding which contracts best protect the company and accurately reflect the business’s interests. Also, contract compliance audits can show you where your processes are inefficient.
- If your business is considering making a significant investment or substantial purchase, a contract compliance audit will help create trust and transparency.
In conclusion, a contract compliance audit will save your company time and money. As a result of the audit, you may find ways to streamline antiquated processes, merge and update documents, and collect outstanding funds from vendors. If you decide to conduct an internal audit, we’d love to hear from you. Tell us why you felt now was the time to carry out an audit. Let us know how you built your contract compliance audit team. What did you focus on and was it successful? We’re eagerly waiting to hear about it!
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