Power of Prevention: Compliance Audits
Organizations historically performed supplier contract audits to monitor and manage contracts and ensure all parties meet their agreed-upon terms. This includes finding past billing errors and recouping funds when overbilling is identified.
Although important, the truth is that contracts can often be opaque, making noncompliance difficult to detect, leading to value leakage.
Today, companies increasingly demand enhanced audit strategies that expose errors sooner and prevent their reoccurrence. This noticeable shift in gears—from past recovery to preventive measures—is driving a more proactive approach to contract compliance auditing.
Commercial compliance auditing is an expanded service that helps companies overcome the shortcomings of traditional contract auditing methods and delivers greater value in the long run. How is this possible?
- Corrective action becomes the primary, rather than secondary, focus.
- A proactive approach helps accelerate timelines for when audits start and finish.
- Newer methodologies address blind spots found in traditional contract compliance audits.
- Technology enables the auditor to reach broader and deeper into a contract than was possible before.
- Auditing companies use their findings to help educate customers on why problems occurred and how to avoid them moving forward.
Auditors performing commercial compliance audits measure success by delivering historical cost recovery and future cost savings resulting from corrective actions initiated during the audit. Traditional contract compliance audits compare vendor/supplier billing history against the procurement contract to find errors and omissions in the contract. This approach contains several blind spots, including little focus on leakage coming from the root causes originating in finance or operations.
A Broader Focus
Commercial compliance auditing expands visibility, moving beyond the narrow focus on contracts and vendors/suppliers to include a review of high-risk elements within operations and finance. It also aims to help organizations implement actionable corrective actions to address the source of leakage.
Although a shift in mindset from reactive to proactive is critical in adopting next-generation contract compliance auditing, that doesn't mean that a traditional audit becomes obsolete. Recoveries are still a significant source of value—sometimes uncovering millions of dollars—and an excellent source of funds. Instead, the traditional approach works in tandem with more proactive methodologies.
Proactive audit approaches fall into five key areas:
1. Prepayment audits address risk before leakage occurs. Auditors may work on-site to evaluate invoices before they are approved and paid.
2. Diagnostic audits tackle specific known problem areas and take corrective action immediately.
3. Accelerated audits deal with known high-risk areas such as monitoring a high-risk supplier or high-risk, difficult-to-evaluate provisions.
4. Real-time audits are useful during high-volume work environments and often require on-site auditors for active monitoring.
5. Specific risk audits concentrate on lower-spend suppliers and targeted high-risk errors, such as per diems and rebates.
Commercial compliance auditing provides many opportunities to add value to an audit program that will produce revenue-generating results and elevate the level of compliance, leading to long-term sustainable future cost savings.