Author: Brett Knox
May 9, 2024 - 6 MIN. READ
What did our teachers always advise? "Check your work." A procurement audit allows you to do just that. It will enable you to review your procurement procedures to see if you've missed anything and specify steps to do a better job. Your audit will identify irregularities, maintain compliance, eliminate inefficiencies, and spot potential fraud.
Understanding the Procurement Audit Process
Your audit will proceed in stages. They will include:
- Planning.
- Fieldwork.
- Reporting.
- Follow-up.
We’ll highlight each step below.
Planning
Your first step in planning the audit will be determining the responsible parties. You may be designating an audit team. Companies often tag the procurement head as the team leader. This choice, however, may lead to doubts about thoroughness or conflicts of interest.
A person used to purchasing in a specific manner may overlook problems a fresh pair of eyes could catch. Selecting a team and leader from outside the department may be a wiser choice.
Fieldwork
Once you have your team, you need to brief anyone impacted by the audit about what the process will involve and the benefits it will confer. You will also need to get their input on potential problem areas. Instruct your audit team regarding interactions with company personnel. One-on-one meetings can be helpful. However, writing your audit plans and procedures will ensure communication and understanding.
Reporting
At the official close of an audit, your team will put together a clear report of its findings. They can use graphs, charts, or materials to make the document understandable. It would be best if you make the information available to whatever decision-makers can use it to spur more efficient operations and improve company-wide outcomes.
Follow-up
The audit report will uncover weaknesses within your company. You will want to keep track of suggested procedural changes to ensure they produce the desired effects. This will entail continuing contact with any affected parties.
An audit will often also uncover problems with suppliers. Your first step will be communicating the results to them as clearly as you communicate issues internally. Your documentation should point out a vendor's strengths and weaknesses. You will include proposed corrective actions and specify the deadlines for when you expect them to be implemented.
Key Areas to Focus On During a Procurement Audit
Your audit team will concentrate on these main areas:
- Vendor management.
- Contract Management.
- Compliance.
- Risk management.
Each of these categories has specific pitfalls and documentation requirements.
Vendor Management
Your team's first question will be: "How did you choose your vendors?" They will be looking at the equipment, parts, materials, and supplies your company purchased. In addition to pricing, they will identify the largest product categories purchased, largest quantities of individual products, on-time deliveries met, damaged goods received, and quality of packaging. An audit will search for ways to improve any and all of these aspects. Global political conditions will impact some of the vendors currently being used. Sanctions and tariffs can affect costs. Foreign conflicts create logistical roadblocks.
Contract Management
If your company has specific performance criteria for vendors, your team will check that your suppliers adhere to them. Contracts should specify that these requirements are met. The audit should note any contracts that don't comply. As local and global procurement conditions evolve, the contracts should prevent losses due to these changes. The company should also keep accessible records of all arrangements.
Compliance
Contracts involve two parties. While your suppliers must comply with contracted terms, your company must also adhere to them. You can use an audit to monitor compliance on both sides. By examining how well agreements are kept, your team can identify which vendors have shortcomings and which are in-compliance.
The other part of compliance is purchasing compliance by your employees. What percent of purchases, by volume and dollar amount, are being purchased from non-preferred suppliers? What type of products are they purchasing? This is a critical part of the audit because if employees are purchasing from non-preferred suppliers (often referred to as rogue or maverick spending), your company is not benefitting from growing your buying power with the preferred suppliers you have a agreements with. When you do your periodic negotiations for discounts and terms, you will be in a lessor bargaining position.
Risk Management
Some industries, such as pharmaceuticals, rise or fall by strict adherence to government regulations. A well-executed audit will ensure that your company meets industry standards and follows regulations to the letter. The risks of non-compliance are high. You can lose customer confidence and suffer the resulting loss of business. In severe enough cases, you may be forced into recalls or complete shutdowns. Your audit can prevent those catastrophes.
Problem Areas to Watch For
Procurement contracts, processes, and history all present unique challenges. Your team should examine these areas in detail to identify improvement opportunities. Some of these changes can be implemented long-term. Modifications that require prompt intervention should draw the most intense focus.
These individual spheres will eventually be integrated into the final report. However, it would be best if you dealt with anything requiring immediate attention as soon as the team discovers it.
Spotting Red Flags
Your audit team can find crucial clues to potential problems by studying purchase order forms. These are, or should be, completed every time your procurement department orders anything. Employees attempting to perpetrate fraud may manipulate the paperwork to disguise it. If your company has many of these forms, your audit team can use sampling techniques to check representative documents for signs of tampering or inconsistencies.
Your team should also look at the duration of tasks such as producing requisitions, placing orders, and processing invoices. If any step acts as a bottleneck, they can look for ways to simplify the procedure. Feedback from the personnel working on these tasks can provide insight into productive adjustments.
Your audit team should search out spending taking place outside the procurement department. If your company issues credit cards to department heads or upper management, they may make purchases not subject to procurement review procedures. The team should check that all expenditures fit company guidelines and that investments are made from approved vendors.
Best Practices for Conducting a Procurement Audit
In addition to comprehensive planning, conducting a successful audit involves careful team selection, identifying your scope, and communication with all your stakeholders. A thorough, effective audit will include data analysis highlighting failure and success points. Your team will be conducting candid interviews and reviewing relevant documentation.
Feedback can be your audit team's most powerful device. While interviews can be an excellent source, surveys, meetings, and online platforms can yield important information. If your workforce can't understand newly generated procedures, it can't follow them. Clarity and consistency in any recommendations generated are your most effective implementation tools.
Making it Happen
Encouragement to conduct regular procurement audits is your way to ensure ongoing compliance, identify areas for improvement, and mitigate risk. Raiven can help guide you in a procurement audit and identify issues and opportunities for improvement.
Often procurement audits find rogue spending, redundant and wasteful spending, and failure to capitalize on pre-negotiated discounts.
With the Raiven Marketplace you can eliminate all these issues with one centralized platform for all your purchasing and pre-negotiated discounts of 7% to 30% with industry-leading suppliers like FedEx, Ferguson, Grainger, Graybar, HD Supply, Home Depot, Koch Filters, Lowe’s, Office Depot, Staples, Sunbelt Rentals, Schneider Electric, United Rentals, and more! Plus purchasing tracking, vendor spend analyses, and procurement audits.
Contact Raiven today to learn more.
