In this century, most of the companies have contract with their suppliers. The Complexity of service contracts/ agreements along with customized good and services makes is extremely difficult for the suppliers to bill and provide services accurately and even more difficult for consumers to validate the accuracy of overbilling as well as the services or goods received, meeting the contractual obligations.
When it comes to contractual obligations, the thumb rule is “Trust the Supplier, but Verify the Facts”.
Moreover, recovery of capital loss is a mere norm with reference to penalty clauses in the contracts/ agreements. Organizations most often lose significant amount of license fee, revenue to be recognized, royalties and end up in paying higher amount to the suppliersfor receiving lesser or poor quality service or goods, then as agreed mutually in the governing contact/ service agreements.
In these case, taking the services of an Internal Audit Team or hiring an external auditing body to perform “Contractual Compliance Audits” not only helps the organization to keep off their losses, over payments and obtain better quality of goods or services, but also helps in improving the mutual partnership and better reporting of information,improvement of contractual language as well as remediation based on documented instance of reported non-compliances. It ensures that the contractual arrangements you have with your vendors align with the products and services they deliver, leading to a healthier and more productive vendor relationship. Contractual compliance audits are quite common in almost every industry including retail, technology, financial, professional services, and manufacturing.
A well planned and executed contract compliance audit can provide the following benefits:
The cumulative project tenure, milestones payments and the project lifecycle phases to be executed etc. provide an optimal range of period to conduct contractual compliance audit. The Objective, context, scope and approach of the audit varies differently through the range. I suggest to have following two audits during the engagement:
CONTROL AUDITS : Auditing during the primary or early phase gives the customer a better overview of the supplier systems, implemented control and monitoring, supporting objective evidences and documents for the deliverables (services or goods) against the mutual agreed requirements as per the master service agreement. An audit during this phase is known as “Control Audit” as this ascertains the supplier systems and controls implemented to execute the project. The Control Audit indicates findings and issue with a focus of improvement, streamlining and avoiding repeated mistakes.
RECOVERY AUDITS : Audits performed during the last phase of the engagement tenure or nearingcompletion of requested services are termed as “Recovery Audit”, where the key objective is to determine if the vendor provided deliverable are of acceptable quality, confirm to the requirements, SLAs or timelines have been met without impacting the business and are in compliance to the MSA terms. Review of the liability, indemnity and penalty clauses are quite common to avoid any undue situation. It is also recommended to determine whether any vendor requested charges are not a part of the project and invalid, were either duplicated or paid on a prior invoice or are overstated. It is recommended to execute Recovery Audit at a point where the Client still has leverage to collect any negotiated overpayment amounts from the Vendor. Future projects or contracts with the Vendor also provide opportunities for process improvement as well as negotiating recovery of overpayments.
In an IT Industry, the typical MSA or Contractual Compliance Audit would consist of following key activities:
Once the audit exercise is finished, a details summary and documented draft ismade available to both the parties (Customer and Supplier) for internal review, followed by a mutually agreed timeline of closure of the identified nonconformities.The audit group review the closure actions along with the objective evidences and preventive action plan to ensure that the identified risks do not reoccur in future.
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