What Happens During a Contract Audit – And Is Your CLM Ready?

Each and every partnership, vendor contract, and service contract is bound by specific contractual agreements that are set in place. However, once the contract is signed and the agreement is set, very little attention is given to the contract, especially if everything is going well, until an issue arises.

However, this is where the importance of conducting a contract audit comes into play. Contract audit is an evaluation of the contracts that have been executed to ensure that all parties are adhering to the terms and conditions that they signed up to. Contract audit is essentially the health check of the contract, ensuring that the pricing, deliverables, and compliance are being met.

However, a contract audit is not just about identifying errors. It can help you identify opportunities you might not have seen otherwise, enhance your relationships with your suppliers, and even improve your contract management strategy.

In this blog, we will walk you through what happens during a contract audit, why it is important for your business, and how a modern Contract Lifecycle Management (CLM) system can help you be audit ready at all times.

The Anatomy of a Contract Audit: What Really Happens Behind the Scenes

A contract audit is a process of reviewing executed contracts between two or more parties to ensure that all parties are living up to their respective obligations under the contract.

The audit process involves working with various departments within an organization, such as the legal department, finance department, procurement department, and operations department, or hiring an external auditor if an audit is required.

The reason for a contract audit is simple. It is to ensure that the contract is working exactly as it was designed to work and that you are getting the maximum benefit of all negotiations.

The first step in a contract audit process is often to identify its scope and objectives. In this process, different contracts within an organization can be audited, or an organization can audit all its contracts based on the level of risk involved.

For instance, contracts with high value, contracts approaching renewal, and contracts with strict regulatory requirements can be prioritized.

Once this process is complete, auditors can proceed to gather all relevant information regarding contracts. This includes contracts, amendments, side letters, change orders, and all communications.

However, this process alone can be challenging for some organizations because information regarding contracts is often scattered throughout an organization. In this case, a lack of a centralized system can cause this process to be delayed.

Once this process is complete, auditors can proceed to review the financial terms of a contract. In this process, auditors can identify whether an organization is paying the right amount for goods based on the pricing model agreed upon in the contract.

This process often uncovers issues like overbilling, duplicate billing, missed discounts, pricing levels, and rebates.

Next, the audit process involves verifying the performance of operations. In this part of the audit process, auditors seek to determine whether the actual service being delivered matches what was agreed upon in the contract.

For instance, if a service-level agreement guarantees a vendor a 99.9% uptime for a system, auditors will seek to determine whether this was actually achieved.

Another part of the audit process involves reviewing changes to a contract. In most cases, changes to a contract are made over its lifespan. These changes can be in the form of an addendum or a side agreement.

For instance, changes to a contract can be made through a series of amendments or changes. If not properly monitored, it is possible for different people within an organization to work with different versions of a contract.

Regulatory Compliance is another part of the audit process. In some industries, regulatory compliance is a critical requirement. In such cases, auditors seek to determine whether a contract meets regulatory requirements.

Lastly, they consider the legal and operational risks related to a breach of contract.

By doing this, they are able to present a detailed report to organizations on discrepancies, financial effects, and compliance, among other important aspects, by the end of the review process.

The importance of Contract Compliance Audits in Modern Business

In the complex world we do business in, organizations are often party to hundreds, if not thousands, of different contracts with various partners, such as vendors and customers.

It becomes virtually impossible to keep track of whether all these contracts are performing optimally without regular audits.

Conducting a contract compliance audit gives an organization a clear picture of how its contracts are performing.

It also helps in ensuring that all internal and external parties are complying with what has been agreed upon in a contract.

One of the most immediate benefits of a contract audit is cost recovery.

Billing discrepancies are often common findings from a contract audit, and they might have gone unnoticed if not for the audit.

Inaccurate rates, double billing, and credits are often common problems, and they might result in a loss of profit for an organization.

This will enable the organization to reclaim the money and avoid similar problems in the future.

Another important advantage of contract audits is the reduction of risks. In most contracts, there are legal requirements which, if ignored, may lead to legal action against the company.

Auditing contracts will enable the organization to recognize legal compliance issues before they become major problems, which will reduce the risks of legal action.

Auditing contracts will also enable the organization to improve the relationship with the supplier. Initially, auditing contracts may appear to be confrontational, but in most cases, it can lead to better cooperation.

When the discrepancy is realized, the two parties will be able to understand each other better, which will improve the relationship.

Audits also play an important role in business process improvement.Auditing the management and execution of contracts will help organizations identify areas of inefficiency in managing contracts.

For instance, an audit could highlight inefficiencies in approval times, contract terms, and documentation. Improving these areas will lead to better efficiency in managing contracts.

Another significant advantage of conducting contract audits is the ability to make better strategic business decisions. Auditing contracts will provide valuable information on the performance of suppliers, profitability of contracts, and compliance.

This information will enable organizations to make better strategic decisions when entering into contracts.

Perhaps the most significant advantage of conducting contract audits is to ensure that organizations benefit fully from contracts they have negotiated.

Many organizations negotiate good deals but fail to benefit fully from the contracts. This is because they fail to monitor the contracts after signing. Discounts, credits, and incentives are some of the benefits that are usually wasted.

Auditing contracts will ensure that organizations benefit fully from the contracts they have signed.

Is Your CLM Audit Ready? Turning Contract Audits into a Continuous Advantage

Traditional contract auditing involves a series of manual procedures. These procedures involve gathering documents from various sources, examining contracts term by term, and verifying data consistency between spreadsheets.

This process might be feasible if only a handful of contracts exist, but what if there are more? This is where Contract Lifecycle Management (CLM) tools redefine the auditing process.

With a contemporary CLM tool, audit readiness becomes an inherent feature, rather than a process that needs constant attention. No longer will organizations struggle to collect documents once an audit process has started.

One of the most critical features offered by a CLM tool is that contracts are stored centrally. A CLM tool functions as a centralized source where all contracts, including contracts, amendments, and relevant documents, are stored in one location.

This eliminates the time-consuming process of sifting through emails or a shared drive to find the most recent version of a contract.

Another important aspect of CLM software is its ability to track obligations in real time. Contracts often involve many different types of obligations, such as payment terms, service level agreements, and reporting requirements.

With a CLM system, organizations can automate these processes, receiving alerts when deviations occur. This means they can address problems right away, rather than waiting months to discover them during an audit.

Additionally, many CLM tools include robust audit trails. Every time a change occurs related to a contract, such as a revision, approval, or amendment, this event is recorded.

This provides a clear audit trail for a contract, allowing organizations to easily review activity related to a contract.

Reporting is another area in which CLM software helps organizations improve audit processes significantly. No longer do organizations have to spend time gathering data from different places, as they can instantly create reports on metadata related to a contract.

For instance, auditors will be able to quickly identify all contracts with a specific vendor, contracts with specific clauses, or contracts that are nearing renewal.

In addition to this, some of the more advanced CLM solutions also offer AI-based contract analysis. Artificial intelligence is used to analyze contracts and identify specific details, non-standard terms, and potential risks.

This allows organizations to analyze thousands of contracts in just minutes. This is a significant reduction in time for conducting audits.

Instead of being reactive with audits, organizations will be proactive. Instead of performing audits once a year, organizations will be able to monitor contracts in real time.

This is an advantage for businesses because they will be able to quickly identify potential risks, recover lost value, and have better governance over contracts.

In the end, a CLM solution will turn what is currently a stressful process into an advantage. Organizations will be better at managing risk, increasing accountability with vendors, and ensuring contracts are delivering on the value they promised.

Conclusion

Contract audit is not just about ensuring compliance; it is an important tool for identifying risks, improving business performance, and ensuring that contracts are functioning exactly as intended.

In a contract audit, organizations review financial compliance, operational performance, changes to contracts, regulatory requirements, and potential risks. The audit is important to ensure that all stakeholders are delivering on their commitments and that the business is realizing the benefits that were negotiated.

If contracts are not closely managed, a business may lose substantial revenue because of billing errors, discounts, or poor performance. Regular contract audits help prevent such situations and improve contract management across the enterprise.

The success of a contract audit, however, is often directly related to the technology that is available to manage contracts.

A modern Contract Lifecycle Management system eliminates these problems and ensures that contracts are managed effectively.

With the proper CLM platform in place, audits can be completed more quickly, accurately, and most importantly, more beneficial to the business.

No longer will an organization be forced to simply respond to issues when they arise, but can instead proactively monitor the performance of contracts, ensuring continuous compliance.

In a world in which contracts are the core of every business interaction, being audit-ready is no longer optional, but rather a requirement.

Transform Your Contract Audits with Dock 365

Are you an organization currently using manual processes to handle contracts?

If so, the thought of an audit can be daunting, especially when contracts are scattered, obligations are tricky to track, and information is buried in email threads.

Contract Lifecycle Management (CLM) from Dock 365 can eliminate the stress associated with audits, providing the ability to store contracts in a secure environment, track obligations, and gain complete visibility into all contracts.

No longer will an organization struggle to become audit-ready when the process begins, but will instead be able to respond quickly to an audit, knowing they are prepared.

Learn how Contract Lifecycle Management from Dock 365 can improve the entire audit process, allowing your organization to gain the most value from contracts.

Schedule a free demo with Dock 365  today and learn how Dock 365 can transform the entire world of contract management into a competitive advantage.