Contract audit and contract management audit are both essential to developing successful agreements. However, you must understand the difference between these audits and their processes to get the most out of them. When you master the art of auditing contracts, your business will save time and money.
What is a contract compliance audit?
A contract compliance audit program is when you examine and assess the performance of an individual contract. It’s designed to verify that the parties have complied with their obligations stated document’s terms. These audits are conducted according to the parties’ agreement.
Goals of a contract audit
Understand your obligations and liabilities
If your company is not meeting its contractual obligations, you are taking risks legally, financially, and reputationally. To avoid unnecessary risks, you need to know what you’re agreeing to, your obligations, and what you’re liable for.
Identify non-compliance issues
Non-compliance issues aren’t always easy to recognize. They often happen in subtle ways such as missed deadlines, over-charging, or a low-quality product. However, they add up over time if they aren’t identified and can cause significant financial losses.
Correct billing errors
Billing mistakes are common, but they’re rarely intentional, and they go unnoticed more often than not. Over time, small overcharges begin to add up, resulting in your business spending money that it shouldn’t have to. An audit will take a closer look at invoice amounts to determine if you paid more than you agreed upon.
Guidance for improvement
An audit helps you learn from your mistakes to ensure you don’t make them again later down the line. Identifying compliance issues in one contract allows you to develop and improve your safeguards against breaches of future agreements.
What is a contract management audit?
A contract management audit is an assessment of all of your contracts and the effectiveness of your process to handle them.
During a management audit, you analyze each stage of your agreements and identify what areas need to be improved to boost the performance of your contracts. It includes all stakeholders, resources, and processes your company uses to handle agreements, from creation and negotiation to finalizing and monitoring.
Goals of a contract management audit
Uncover hidden costs
An audit lets you look at the areas you’re spending the most on, from creation to signature. You can also determine the number of breaches and missed deadlines and how much they cost your business.
Prevent missed deadlines and renewals
Maybe your contracts are stuck waiting for approval for too long, bottlenecks are pushing you past your deadline, or you simply forget a deadline date. Whatever the case may be, an audit will help you recognize if this is an area you need to improve and the steps to take to meet your future deadlines and renewal dates.
Reduce contract risks
Companies often enter risky agreements without knowing their consequences. Through an audit, you can identify the total risk level of all of your contracts, then take the proper steps to lower it through effective management.
Shorten the time from creation to closure
An internal audit of contract management shows you exactly what areas you need to optimize to speed up lifecycles. You use the contract compliance audit program report data to assess if your current process is efficient and whether or not you need to implement new handling strategies.
A step by step guide on how to audit contracts
Assess risks of each agreement
Before starting a compliance audit, you should go through a risk assessment process. This process highlights the cost and complexity of each agreement to determine which ones should be prioritized and audited first.
Establish audit objectives
You must establish what you hope to accomplish by examining a contract. Do you want to look for overcharges and efficiency? Or determine if deadlines and obligations are being met? Whatever the reason, it’s critical to establish it from the outset to ensure your audit is productive.
Involve the other contractual party
It’s always beneficial to engage the other party during a compliance audit. This should be done warmly so that the other side doesn’t get defensive and damage your relationship. Remember, audits are not to point fingers but to improve going forward.
Debrief and establish a plan for improvement
An audit is a good opportunity for you and your partner to determine what is and isn’t working. After concluding the audit, everyone involved should debrief and address the primary areas that need attention and how the contract compliance audit process went.
Contract compliance audit checklist
Here’s a checklist of all the information you will need to perform a simple compliance audit:
- What is your annual profit margin?
- What recovery strategy do you have in place?
- When was the last time you conducted an audit?
- How do you track invoices?
- How are you protecting your company from breaches?
A step by step guide on how to audit contract management
Determine if your agreements are accessible
If your contracting team can’t access the documents they need to, you overlook an easy way to improve your management process. All of your contracts should be stored in one secure place and can easily be accessed by your employees that need them.
Check your templates
Using templates saves you time and money, but they can create financial and compliance risks if they aren’t updated. Your templates should be designed with spaces for all necessary information, up-to-date, easy to use, and standardized.
Identify missed renewals
Missed renewals are a good indicator that your contract management process needs to be improved. You should look at how many renewals you’ve missed this quarter, how much they cost you, and whether or not renewal and deadline dates are easily accessible.
Ask if your team is seeing eye-to-eye
Contract management requires multiple departments to work together to get the most benefit from company agreements. The process of handling contracts should be standardized and understood by each team member. There should also be clear communication among your team to ensure that everyone’s on the same page.
Contract management audit checklist
- Can contracts be easily accessed by team members who need them?
- Are templates up-to-date for recurring agreements?
- Have there been reporting issues in the past quarter?
- What contract compliance issues have come up?
- What agreements are no longer beneficial?
- What new strategy can be implemented to prevent issues identified during the audit?
The benefits of using contract management software to streamline both auditing processes
Audits are essential to creating healthy contracts as they ensure that the agreement and its management function how they’re supposed to. A contract management audit program has features such as compliance alerts, audit trails, report generation, and accessible storage, so you can make the daunting task of conducting an audit easier than ever.
If you are running into compliance issues or your management process is ineffective, contract management software will identify the specific areas you need to improve.
Olga Mack is VP at LexisNexis and CEO of CounselLink CLM.