Contract Compliance Audit: Overview, Benefits, and Steps

Think about how many contracts your business has. The answer is likely thousands. Now, consider whether or not you can tell someone what any of those agreements entail.

Not knowing the details and terms in your agreements can put your business at risk and leave you wondering if (and more likely, when) you’ll face the financial, legal, or ethical consequences of non-compliance.

Luckily, there’s a way to figure out exactly what you’ve signed up for: contract compliance audits. Contract audits let you closely examine your agreements and learn what you can expect from all parties involved. This way, you can avoid trouble and open up opportunities for better business outcomes.

In this article, you’ll get a clear breakdown of why you need to make contract compliance audits a routine, the benefits they offer, and how to start the process.

What is a Contract Compliance Audit?

A contract compliance audit is an in-depth review of contract terms to make sure internal and external parties are meeting those terms. In some cases, they’re not, but we’ll get to that later.

You can use audits to look over individual contracts, a certain category of contracts, or an entire portfolio—and you can conduct an audit at any stage of the contract lifecycle. In the end, you have a single goal: avoid non-compliance and serious consequences.

What is a Contract Compliance Audit Program?

A contract compliance audit program is a structured process used by businesses to verify whether internal teams, suppliers, or third-party partners are adhering to the terms of their contracts. It typically involves a review of payments, deliverables, and obligations to uncover errors, reduce risk, and improve contract performance.

These audits help procurement, finance, and legal teams recover lost value, improve vendor relationships, and ensure regulatory compliance. They’re often performed quarterly or annually, and may focus on specific suppliers, spend categories, or risk types.

Types of Contract Compliance Audits

There are several reasons to initiate an audit. Some of the most common include:

• Supplier audits ensure a vendor has the right licenses, insurance certificates, and business standards that align with your own. They can also complement third-party performance assessments.
• Risk audits look at the specific language used within a contract to make sure it does not pose a potential threat to the business and aligns with your standard contracting.
• Regulatory audits help you verify that all contract language and deliverables align with federal, local, and global laws. Having a streamlined way to perform these audits is particularly important for highly regulated industries like finance, telecom, and healthcare.
• M&A audits help you understand exactly how a potential acquisition will affect every stakeholder in the value chain.

The Benefits of a Contract Compliance Audit

Contract audits are a vital part of any contract management program. They deliver the transparency needed to improve internal risk controls and provide a framework to measure and track compliance across all contracts.

What does that mean for you? Let’s take a look.

What Do Contract Audits Reveal?

A single audit can uncover several areas ripe for improvement, including:

• Incorrect Payments – Find invoice errors and duplicate, under, or overpayments that cut into your bottom line.
• Unmet Obligations –Compare contracted and actual deliverables to determine if vendors have failed to meet the quality or scope of an agreement.
• Unauthorized Modifications – Quickly find instances when contract terms have been changed without the proper stakeholder input or approvals.
• Regulatory Non-Compliance – Perform contract reviews to determine if any agreements do not follow regulatory laws related to the contract type or scope.

How Does This Affect My Business?

Everything a contract review reveals—from contractual obligations to specific clause usage—can enhance your processes and improve your overall business.

Contract compliance audits can:

• Drive Opportunities for Cost Savings – As audits uncover payment issues and invoice duplicates, you can quickly correct these errors to avoid future losses. That means you’ll avoid value leakage and maintain a stronger bottom line.
• Reduce Risk Across the Organization – When you perform contract audits to proactively identify areas of non-compliance, you can reduce the risk of contract breach and the negative consequences that come with it.
• Improve Supplier Relationships – You can use audit results to ensure you and your suppliers are on the same page when it comes to contractual obligations and business goals. This can also allow you to identify additional areas of opportunity and improve your relationship as time goes on.
• Enhance Business Processes – Since audits can reveal the various strengths and weaknesses within your contract management processes, you can adjust your existing practices to better align with business goals.
• Optimize Reporting – As continuous compliance audits enhance your visibility into your agreements and track risk, you can use this data to improve the outcome of every deal you make.

More and more global enterprises are being forced to shell out millions of dollars in fines and scramble to repair their reputations after getting caught in non-compliance. Don’t let your business be next in line. To keep your company safe, you’ll want to start routinely auditing your contracts right away.

How to Build an Audit Program to Decrease Contract Risk

The right foundation makes all the difference when establishing a contract compliance audit program.

When to Start Conducting an Audit

As mentioned earlier, you can perform an audit at any stage of the contract lifecycle.

A few examples are when certain events come up, such as a business merger, vendor renewal period, or unexpected change in governing law. It’s also good practice to perform preventative audits to make sure no major issues have come about since your last contract review.

Generally speaking, it’s wise to perform contract audits on, at least, an annual or quarterly basis for more regulated areas of business.

Your Contract Audit Checklist

Now that you’ve decided to make contract reviews routine, you’ll want to set up a solid process.

1. Establish Your Objectives – What do you want to achieve during the audit? Your goals will determine the scope of contracts you review and the items you search for.
2. Plan the Timing – Are there internal or external deadlines you need audit results by? Make sure you give yourself enough time to conduct a thorough review.
3. Define the Scope – Are you reviewing an entire portfolio, or are you only looking into contracts that relate to specific categories or contain certain clauses?
4. Communicate Audit Plans – Do you want to keep concerns to a minimum and be able to quickly access any external documents that may affect your audit? Of course you do. Make sure to inform all relevant parties about your audit plans to maintain a productive, efficient process.
5. Review Contracts – Perform your review as planned and gather all the data you defined within your scope.
6. Identify and Resolve Issues – Did you spot language that didn’t align with regulatory standards or identify vendors who weren’t holding up their end of the deal? Note them in your findings and work with the appropriate teams to correct the problems.
7. Suggest Improvements – Would you like to prevent the same issues from popping up in future audits? Partner with relevant stakeholders to use the audit findings to improve overall processes.

Enter AI Contract Analysis

You need to be able to perform contract compliance audits quickly to reduce risk and protect your business. Sadly, manual methods won’t cut it here.

That’s where AI contract analysis comes in.

Next-generation contract management allows you to conduct successful contract compliance audits by empowering you to:

• Establish a digital contract repository
• Extract key data points
• Access audit-ready reporting
• Manage contract obligations
• Configure automate workflows

Incorporating Audits into Your Contract Management Program

You shouldn’t have to wait for disaster to strike to figure out what you agreed to. Contract compliance audits allow you to get ahead of trouble, identify areas of opportunity and improvement, and give you peace of mind as you go through your day-to-day.

Want to speed up audits and gain insights that aren’t possible through manual methods? Request a demo to see how you can use Sirion’s contract lifecycle management platform to transform your auditing processes.

Frequently Asked Questions (FAQs) on Contract Compliance Audit