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Contract Compliance Audit: Overview, Benefits & How AI is Helping

A cartoon laptop with a magnifying glass, depicting a contract compliance audit

What is a Contract Compliance Audit?

A contract compliance audit is an in-depth review of contract terms and whether these terms are being met by internal and external parties.

Audits could focus on evaluating contracts individually, by contract type, or cast a wider net to assess the entire portfolio. The scope of an audit will depend on its purpose. For example, companies usually schedule annual or quarterly compliance audits to examine:

  • Agreement parameters: Clauses, contractual obligations, service level agreements, payment terms, project milestones, deliverables, etc.
  • Statutory compliance parameters: Safety and health regulations, labor codes, data security standards, local and international guidelines, licensing, etc.

Whatever the objective may be, the contract audit process is essential to averting non-compliance—the ramifications of which go far beyond fines and penalties. Broadly speaking, a contract compliance audit can be conducted with different focus areas and at different phases of the contract’s lifecycle, like during authoring and negotiations, post-execution, or to ensure compliance to industry regulations.

To ensure follow-through and prevent business disruption, companies can leverage data gathered from audits to bolster contract management practices and perform root cause analysis for cases of non-compliance.

Below, we’ll go into further detail about the types of contract audits, the benefits of contract compliance auditing, and how SirionOne can help streamline the auditing process.

The 3 Types of Contract Audits

Before launching an audit, businesses must first construct an audit program and develop any necessary audit goals to best match the scope of their contract review. It’s generally recommended to conduct internal audits on a quarterly or semiannual basis, preferably not in conjunction with other major audits. It’s also imperative to define what kind of contracts and contract terms the forthcoming audits will evaluate, and how the evaluations will be conducted.

Here, we look at three types of contract audits and how they help ensure contract compliance:

1. Supplier audits

With the right audit clauses in place, supplier contracts can be regularly audited to evaluate vendor credibility.

For example, a supplier audit could aim to ensure all necessary licenses, permits, insurance certificates, and other accreditation meet local and federal regulations. Supplier audits can also complement third-party contract performance assessments. By comparing contractual KPIs against raw performance data, enterprises can assess if they are able to realize the maximum value from their third-party relationships.

2. Risk audits

Internal (procurement, legal, sales, etc.) and external teams need to have a complete understanding of contract language and its alignment with both department objectives and company goals.

By performing a contract risk audit, companies can accurately evaluate legalese to identify potential issues across existing contracts, such as missing clauses or clause deviations (a process made easier with AI-led legal review). Risk audits can also be done at the contract creation phase to evaluate if standard clauses and positions are being adhered to during new contract drafting. This will help reduce instances of maverick contracting.

Findings can then be communicated to relevant stakeholders, laying the groundwork to understanding and subsequently resolving any risks, liabilities, and exposures associated with these issues.

3. Regulatory audits

Meeting legal/regulatory requirements can be difficult when companies have hundreds to thousands of contracts to manage. This applies especially to highly regulated industries such as finance, telecom, and healthcare, all of which require meticulous oversight to ensure compliance.

To secure follow-through and limit bureaucratic pitfalls wherever possible, companies may conduct periodic audits to monitor compliance with all external (federal, local, global) regulations.

What Are Some Benefits of a Contract Compliance Audit?

Auditing is necessary to achieve total transparency and improve internal risk controls at all levels. Contract audits also provide businesses with an accurate framework to measure and track compliance across contracts. This not only mitigates the risk of non-compliance but also accelerates statutory reporting.

Below, we’ve outlined some of the many benefits contract audits can provide:

  • Visibility into contract responsibilities for improved value realization: By conducting a compliance audit, businesses can gain a comprehensive overview of past and current contracts. Business outcomes may then be discerned based on the impact of contract liabilities and obligations.
  • Improved trust and client-vendor relationships: Ensuring that all stakeholders are on the same page is important to the longevity of any business relationship. Audits help improve transparency and offer insights into unrealized opportunities and what can be done to realize better business outcomes.
  • Risk management: By conducting periodic contract risk audits and identifying areas of non-compliance to the approved contracting process, companies can reduce their risk exposure and take corrective steps for improved risk mitigation.
  • Enhancement of the contracting process: Insights from audits can be used to pinpoint strengths and weaknesses in current contracting practices. By discerning what is and what isn’t working, improvements can be made to contract management and contract administration to better align with business goals.
  • Cost savings with enhanced billing accuracy: Contract audits when paired with an automated invoice reconciliation process can help identify opportunities to plug value leakage associated with billing errors and overpayments.

How AI-powered CLMs Can Help Conduct Better Contract Compliance Audits

Manual audit processes to ensure contract compliance requires hundreds of man-hours. As a result, the process remains unscalable, unless more resources are added by assuming additional overhead costs, which could negatively impact the bottom line. Legacy tools like spreadsheets can also lead to user errors and effort duplication, defeating the purpose of more transparent follow-through.

Companies, however, can overhaul traditional processes with next-gen contracting methodology. Using contract management systems like SirionOne, contract auditing can be simplified through the following functionalities:

  •     Repository: SirionOne provides a cloud-based contract repository to consolidate and digitize your entire contract portfolio. This not only simplifies storage and establishes a single source of truth for all contract data—but SirionOne’s repository also offers anytime, anywhere access and a complete audit trail of changes and communications.
  •     Extraction: Take a comprehensive approach to compliance audits with detailed contract analytics. Using SirionAI, an extraction engine pulls contract data and transforms intelligence into actionable insights. Data can then be reviewed and modified as necessary to comply with and enhance the visibility of company and regulatory requirements.
  •     Analytics & reporting/dashboards: Following digitization, insights gathered across the contract lifecycle can be used to preempt different types of risk. Configurable role-based dashboards and data visualizations may be leveraged to take predictive corrective actions and course correct where needed. Dashboards additionally provide audit-ready reporting for various internal and external auditing inquiries, reducing response time from months to days.
  •     Configurable workflows: Automation aids compliance during the contract creation process. Pre-approved templates, clauses, and contract positions can be implemented with SirionOne’s contract setup tools to drive contract compliance and ensure all stages of authoring are auditable.
  •     Performance tracking: The gap between value deliverance and value expectation can be minimized with granular obligation management. SirionOne’s CLM software provides real-time updates on contract performance – enabling auditing for all ongoing contract data and accurate assessments for value realization.
  •     Invoice validation automation: SirionOne’s unique auditing functionality extends to invoicing. Companies can eliminate discrepancies through auto-validation of all invoices and maintain invoice audits to catch overcharges and other inaccuracies. This helps reduce value leakage and prevent non-compliance due to computation and user errors.

By taking advantage of the above functionalities, companies can put in place processes for conducting successful contract compliance audits. To learn more about SirionOne’s contract lifecycle management solutions and how they can help transform your contract auditing methods, request a demo today.

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