Best Practices Require Regular Procurement Audits
When a business purchases the resources needed to operate, managing the company spending is necessary to prevent overspending and build good relationships with suppliers that you can depend on in the future. This essential process is called a procurement audit.
Procurement management includes a series of processes. The audit is just one of them. The additional procedures include:
- Requisitions and purchase orders (POs)
- Supplier solicitation
- Contract negotiation
- Managing suppliers
- Order/invoice approvals
Procurement audits focus on analyzing suppliers and contracts to determine the efficiency, accuracy, and legitimacy of current processes. Additionally, the results also help shape future purchasing procedures.
Spending includes direct costs (ex: staff salaries, insurance), production costs (ex: raw materials used in manufacturing), and indirect costs (ex: professional services, travel).
Areas of Audit Focus
The management and enforcement of procurement practices is a big job. The audit process helps the purchasing department stay on top of multiple areas:
- Spending performance: Seeing where money is going, negotiating more substantial contracts, finding better suppliers, optimizing spending, and contributing to increased profitability.
- Visibility in the supply chain: Evaluating your supply chain helps prevent administrative errors (and by observing that you value policy compliance, hopefully, your suppliers will be motivated to evaluate their practices).
- Legitimacy: Detecting and protecting against fraudulent invoices (billing schemes are the most common fraud for small businesses).
- Risk management: Correcting compliance fraud and breaches of industry standards.
- Streamlining workflow: Identifying obsolete and redundant business practices that slow down the purchasing cycle, such as ordering similar products from multiple suppliers instead of placing bulk orders.
- Audit trails: Preparing for external audits (by another business or the government) by establishing an audit trail.
It’s important to note, procurement audits will not yield their full benefits overnight, but they will provide a step-by-step process improvement.
Procurement Audit Best Practices
Here are some best practices for procurement audits that detect problems, identify resources needed, and drive robust internal controls.
Getting buy-in from supervisors should be the priority. Gather manager input to help you focus audit efforts. Are any particular suppliers not delivering needed results? Start there, then proceed to processes and policies that require acknowledgment.
In addition to management, stakeholders give approvals and make purchases. They are unwilling to give up control that quickly, so ensuring they understand your intentions is essential. Show them how the audits improve process integrity. Get feedback as well; some stakeholders may be able to share pain points or have ideas for specific changes they think the company should pursue.
Make sure purchase orders (POs) are complete and correct, including PO numbers, supplier information, full product descriptions, pricing accuracy, and authorized signatures. Then compare them to final invoices and payments. You may need to double-check sample POs and invoices for each supplier if working manually due to the volume.
Supplier selection is an additional primary responsibility of procurement. In addition to developing the ability to place bulk orders covering multiple departments, each contract should be analyzed to see if it corresponds to the company’s standards.
- Areas of analysis should include:
- Accurate contracts that are easy to understand
- Credit availability, interest rates, and payment terms
- Delivery practices
- Rebates, bulk discounts, and other ways to save money
- Quality of provided services
- Supplier reputation
It’s not unusual for procurement audits to uncover new discounts, better payment terms, etc., that the project team missed originally.
Procurement audits don’t end with your suppliers. The audit also needs to analyze your company’s procurement procedures, such as how contracts are approved. Furthermore, each step in the process must be monitored and maintained to ensure it meets specifications.
Compile a report of all audit findings with actionable insights to encourage corrective action. If the data identifies inefficient contracts, failures to comply, or potential fraud, talk with project management about ways to correct the problems.
Project management includes many contracts, processes, documents, and feedback. Here’s a checklist that covers most procurement audit responsibilities.
- Organize all purchases, including those with hard-to-follow contract terms, new discounts, pricing errors, and other issues.
- Be cognizant of what happens during the purchase order process, from writing up and placing the order to receiving the goods.
- Analyze the performance of each supplier contract and whether it is on par with company standards and policies.
- Verify that invoice processing is timely, accurate, and complete.
- In light of audit findings, determine what can be done to reduce risk, ensure compliance, increase efficiency, and resolve any related issues.
Look into Audit Automation Tools
As difficult as audits can be, they are much easier to complete if you have an automated system to help out. Online services can provide tasks such as:
- Cloud-based collaboration
- Workflow visibility
- Quick supplier comparisons
- Real-time price analytics
- Records management
Automated procurement tools can also be set up to automatically send the proper documents to the right people, ensuring that all stakeholders are kept informed, and audits can be completed more quickly.