Contract audits are an important tool for businesses to ensure that they are meeting their obligations and receiving the benefits outlined in their agreements.
In this blog post, we'll walk through 10 steps for conducting an effective contract audit. From proactively identifying problems to creating a dedicated audit team and establishing clear objectives, these steps will help ensure that your contract audit is thorough and efficient.
By the end of this process, you'll have a better understanding of your obligations, risks, and opportunities, as well as a plan for improving internal procedures and controls.
10 steps for performing an effective contract audit
Here’s how to conduct a successful contract audit:
#1 Try to conduct proactive instead of reactive audits
Proactive audits are health checks of your agreements that must be done periodically. They can help you identify a problem and solve it before it can do any damage to your business.
Reactive audits are done when fraud is suspected during mergers, acquisitions, fundraising, or capital expenditure. You wouldn’t have to conduct a reactive audit if proactive audits are done every now and then.
#2 Find the scope of the contract audit
Check whether you need to audit the entire contract or specific sections of the agreement. Are you examining certain contract types or complete portfolios? This information helps you set the scope of the contract audit.
For scaling businesses, it makes the most sense to start small with batches (review by contract type) and apply the lessons learned to other clusters of contracts. So, at the end of this exercise, you will have a rough count of the number of contracts and the category of contracts you'll audit.
#3 Establish appropriate timing
Finding the right time to conduct a contract audit is in your best interest because more comprehensive contract audits require extensive and special attention. Conducting an audit during the tax season or other similar occasions should be your last resort.
Ideally, before deciding on the time to start the audit, study your current business priorities and ongoing projects. This process will aid you in estimating the approximate duration for contract review.
#4 Clearly state your goal
Audits can be time-consuming. So, knowing what you would like to accomplish at the end of auditing thousands of contracts is essential. Companies have a variety of reasons to conduct contract audits: control costs, improve the quality of contracts, drive process efficiency, etc.
Below are some examples of audit objectives –
Getting a grip on your obligations
A clear goal of contract audit is to become fully aware of the requirements outlined in your contracts and any potential risks. At the end, you should be able to learn your liabilities and rights.
Analyzing the dynamics of billing
A thorough audit could confirm invoice amounts. Check if you are being charged appropriately and ensure you aren't overcharging or underdelivering to your customers.
Mastering what's inside your contracts
The terms of your contracts typically dictate how you should handle non-compliance. You should be aware of your choices. Does the contract require arbitration? What rules govern a lawsuit's venue, choice of law, filing requirements, and damages clauses? Your contract audit can merely be a drill of answering these questions.
Discovering process improvements
There is always room to do better when it comes to managing contracts. Look into your data and analyze it to see recurring problems and fix them. Gathering key insights from data for improving internal procedures and controls is the most viable way to make your contract audits more effective.
Setting internal checks and balances
Finalize measures and procedures to spot and address non-compliance. Contract audits help you devise methods to ensure how contracts are implemented or carried out.
💡Pro tip: Communicate the audit objectives to all stakeholders and align everyone around those goals. Create smaller milestones for all parties involved.
#5 Create a dedicated audit team
As an organization with multiple on-priority tasks to take care of, you could hire a consultant to handle the audits. You can even combine internal and external stakeholders to gain more benefits.
A neutral third party can be helpful if your firm needs to assess its entire portfolio, has never undertaken an audit previously, or is working with decentralized storage.
Assign roles and responsibilities prior to starting contract audits in order to avoid missing or repeating work. The team is crucial to the security of the audit. Therefore, team members must be granted the proper rights, permissions, and privileges.
#6 Foster collaboration
When you start including all the necessary stakeholders in contract audits, they begin to work. Include everyone who has used templates to create contracts and not only the legal department. This process increases openness and builds confidence.
Also, external stakeholders, or those with whom you have sealed agreements, should be considered. It is crucial to collaborate with contracting partners and involve them in the audit process.
#7 Communicate audit details to everyone
The secret to a successful contract audit is communication. Inform each team member and other contractual parties in writing of the audit's purpose, objectives, and scope. By doing this, you achieve peace of mind and ensure that no one is under personal investigation.
💡Pro tip: Avoid top-of-the-mind oral communication (steer away from speaking spontaneously) and create a solid argument to explain why you requested an audit.
#8 Prepare for security and privacy concerns
Check to see if your contracting partner can give you access to all the documents you require. Look for audit clauses within your agreements in this particular instance and cling to your contractual rights as outlined in the contract.
💡Pro tip: It's always best to hire a professional service provider to conduct contract audits, as they would be familiar with every party's security and privacy requirements.
#9 Organize essential documents
Gaining access to relevant contracts is likely the first issue you run into when starting a contract audit. Finding and organizing these contracts manually before an audit can be complex, whether saved on the cloud, printed out, or filed in storage cabinets.
💡Pro tip: An intelligent contract repository and contract management software simplifies organizing your files before the contract audit.
#10 Debrief, learn lessons, and implement
A contract audit's primary objective is to identify potential issues and address them before they worsen. Therefore, a contract audit is a valuable opportunity for businesses to identify their strengths and weaknesses.
Even the auditing process itself can be used as a learning tool. Those involved in the process should summarize the audit process and any contracting challenges that need to be addressed and use this information to plan for the future.
💡Pro tip: Create a final report with non-compliance instances and specific remediations. Also, it's a good practice to highlight how you plan to improve the internal process for positive results.
Also read: 5 Best Practices for Contract Audit Success
Employing contract lifecylcle management for contract audits
Thanks to contract lifecycle management (CLM), businesses have access to insights into all contracts with customers, sales partners, suppliers, and other stakeholders across the company. Some benefits of conducting audits with a CLM include:
- Keep track of compliance: Team members can work with the right stakeholder for fulfilment and monitor compliance status with the help of workflows.
- Track obligation: Contract managers can utilize obligation management to track critical terms and dates. This functionality helps them fulfil obligations on time and maintain compliance.
- Help cross-functional teams succeed: Effective contract obligation management is also vital for departments like sales to ensure that a company fulfills its customer responsibilities.
“The key to managing contract compliance is establishing a robust process. For instance, as part of proactive audits, teams should identify relevant departments and stakeholders who track and certify adherence or non-adherence.”
Diwyata Burbure | Senior VP, Legal Tech, SpotDraft
SpotDraft makes contract management and audits easy
If you’re struggling with conducting contract audits or managing contracts in general, get in touch with us and we will show you how SpotDraft can help you live up to your promises and meet compliance.