By Jack Macfarlane, Founder and CEO of DeepStream
Procurement fraud can be crippling for any organisation. In the past year, there has been a 13 percent rise in cases, collectively costing £136.6 billion in damages and lost business.
Audits are an inspection of a company’s financial situation that ensure procurement processes are secure, cost-efficient, and free of fraudulent activity – all of which are key in safeguarding current and future trading partnerships.
But why are procurement audits important? How can they lower risks and benefit organisations? And what is the best way to complete an effective audit process?
The procurement audit explained
Procurement audits review the entire procurement process from start to finish. This includes looking at supplier contracts, vendor history and current practices undertaken by managers and employees to spot red flags and anomalies in the supply chain and ensure current procurement processes add value to the business.
Procurement audits ensure contracts are being adhered to, mitigating complicated and unnecessary legal challenges.
The main objectives and benefits
Procurement audits help businesses identify ways to achieve the most cost-effective trading relationships, quickly identifying contract or regulatory non-compliance and fraud before they happen.
Businesses reap several benefits from an effective procurement audit, such as:
#1 Better spending
A key premise of procurement is to secure the most cost-effective partnerships where possible by staying up to date with market-related prices and frequently reviewing how money could be better spent.
When new suppliers enter the market offering more attractive pricing or unpredictable geo-political conditions cause a spike in prices, procurement audits enable organisations to identify opportunities for greater cost-savings, which helps build financial health and stability.
#2 Improved traceability and fraud prevention
With the prevalence of procurement fraud, traceability is key.
Procurement audits allow organisations a plainer view of the entire supply chain, enhancing transparency and eliminating opportunities for fraud.
A key pillar of fraudulent behaviour is having the opportunity. If a company frequently invests in procurement audits, the risk of being caught becomes higher and instances of fraud are less likely to happen.
#3 More efficient workflows
Legacy processes become outdated and new technologies allow businesses to streamline workflows, benefitting financial health. Without frequently auditing current practices, inefficiencies are identified too late or missed, resulting in missed cost savings.
Procurement audits allow businesses to identify where improved efficiency is needed, including targeted staff training, diversifying and increasing vendors, and removing outdated practices.
#4 Reduced legal risk
Procurement is a complex business operation where legal challenges quickly arise if vendor contracts are breached or stringent government regulations and procurement standards are not met.
Audits create a digital paper trail, helping businesses remain compliant by regularly combing through contracts and regulations, avoiding the cost of legal challenges.
Conducting an effective procurement audit
An audit should be conducted by an appointed procurement team overseen by a dedicated incident manager. The incident manager is responsible for ensuring the process is conducted correctly and transparently, ready to deal with any anomalies or problems identified.
A procurement audit should involve management from the get-go, ensuring any directives are implemented immediately without delays. Regular meetings must be held with every detail recorded and industry guidelines followed.
Identifying problem areas within the three main categories of procurement is the first step in an audit. These categories are contracts, processes and historical data, which are fundamental to procurement operations.
To mitigate legal risk and fraudulent activity, audit teams should dissect purchase order forms and store all supplier communications and contracts in a centralised digital platform, such as RFx software. Any suspicious activity should be quickly identified through the audit trail and promptly flagged.
Audit teams then review vendor selection processes to remove any chance of fraudulent activity happening, looking for an unusually small pool of vendors, inflated vendor prices, repeat selection of vendors and unlikely candidates winning contracts for example.
Lastly, all key insights should be compiled into a comprehensive report examining potential leads, oversights and red flags, detailing how these are going to be addressed, providing timelines and further suggestions to prevent similar problems in the future.
Procurement processes are complex and deal with vast quantities of data. It is paramount that there are at least four audits a year. However, a monthly procurement audit is the recommended industry best practice.
Together with routine audits, additional audits should be standard procedure in the event of any major business change, such as onboarding a new vendor or winning a new contract.