A contract compliance audit plays a pivotal role in risk management, making sure your organization is adhering to your contractual obligations within an organization. That means it’s an essential aspect of effective contract lifecycle management.
Here, we’ll take a closer look at different types of compliance audits, and discover the benefits of making them standard parts of your contract review process. Then we’ll walk step-by-step through the process of conducting one. So let’s dive in!
A contract compliance audit is a systematic review you conduct to make sure your organization adheres to the terms outlined in its contracts. This type of audit plays a vital role in contract management by identifying discrepancies and areas where contractual obligations aren’t met.
Unlike other types of contract audits, which may focus on financial aspects of overall performance, a contract compliance audit specifically targets adherence to contract terms. It analyzes whether or not all parties involved are upholding their ends of the agreement — and why or why not.
This type of audit helps ensure compliance by pinpointing precisely where and how contractual obligations are being met or missed. It’s a process that’s integral in maintaining transparency and accountability in all business interactions, while supporting long-term risk management.
The primary purpose of a contract compliance audit is to ensure your organization complies with all contract terms. By thoroughly examining all contractual obligations, and the practices in place to meet these obligations, you can determine whether every party is fulfilling their responsibilities.
Identifying areas of non-compliance is another critical goal of compliance audits. Through detailed analysis, you can uncover aspects of the contract that are not being adhered to, so you can take timely corrective actions.
Compliance audits also reinforce the overall integrity of your contract management process. They provide valuable insights for continuous improvement, and help in refining internal controls, too.
Contract compliance audits fall into two broad categories, and it’s important to know the difference.
It’s worth noting that reactive audits can be costly and time-consuming, often leading to strained relationships with parties involved. Proactive audits, by contrast, help you maintain consistent internal controls, leading to cost savings and smoother contract management over time.
For example, a reactive audit might be conducted after a supplier fails to deliver goods on time, revealing areas of non-compliance in the process. A proactive audit, conversely, could involve regular reviews of supplier performance, identifying potential issues before they impact the bottom line.
The benefits of performing regular contract compliance audits break out into four key areas:
Here’s a list of steps to get you started performing audits for contractual compliance.
You’ll be able to stay ahead of the auditing process much more effectively, and manage your contract compliance in a proactive way, when you follow these best practices.
Contract compliance audits not only safeguard against risks, but also enhance your relationships with other stakeholders. Implementing the best practices and steps outlined in this guide will lead to improved compliance, cost savings, and a stronger bottom line.
