How to Effectively Conduct a Procurement Audit
Every business wants to ensure its procurement process is secure, free from fraud and cost-efficient. Part of the process of achieving these goals is through a procurement audit.
In this article, DeepStream explores what a procurement audit is, why it’s beneficial and some best practices for carrying out an effective procurement audit process.
What is a Procurement Audit?
Procurement audits are regular reviews of the entire procurement process, including supplier contracts, vendor history and the practices enacted by employees and managers. The aim is to make sure all processes are adding value to the business.
Imagine a bicycle distributor wants to ensure the viability of the parts it orders. The most effective method is to review the procurement process from the competitive bidding stage to the traceability and transparency of suppliers.
A comprehensive procurement audit helps identify any risks and potential fraud in the supply chain, as well as keep purchasing processes efficient and cost-effective.
It also allows a company to evaluate suppliers and whether they’re keeping in line with the contract.
Objectives of an Effective Procurement Audit
A procurement audit isn’t just a tick-boxing exercise for businesses – it offers many benefits, including:
- To root out any potential supplier inconsistencies.
- To avoid fraudulent activity.
- To keep in line with government and trading compliance regulations.
- To identify where a business can be improved in terms of workflow.
Ultimately, the main objective of procurement audits is to allow businesses to access the most cost-effective trading relationships – not only by achieving the best vendor prices but also by remaining compliant to avoid lost custom through fines or damaged reputations.
What are the Benefits of Conducting a Procurement Audit?
An effective procurement auditing process can deliver several key benefits as described below:
Procurement audits allow businesses to understand exactly where money is being spent, and whether cost-cutting measures could be made to reduce the cost of supply.
For example, if a procurement audit reveals a poor shipping process is resulting in the loss and damage of goods – and ultimately costing the company to replace items – the business can review its vendors and logistics partners to remedy the issue and facilitate a better stock-protection program.
The process also reveals exactly how a supply chain is being run from the top down. Not only does this improve the visibility and traceability of stock, but also the accountability of staff.
For example, a business identifies its logistics partner hasn’t been effectively recording stock handling processes and that an employee has been skimming stock to sell to a third party. Once the culprit has been identified, this instance of procurement fraud can be stopped.
For more information on the importance of traceability in the supply chain, read our dedicated guide.
An effective audit allows not only the detection and eradication of existing fraud but also allows for systems to be put in place to prevent future fraudulent activity.
Now the business understands where these bicycle parts are being skimmed, they can roll out processes in the logistics and shipping divisions of their company to verify identity and perform background checks on staff to further prevent the likelihood of fraud.
With an effective procurement audit, a business can also improve its workflow by identifying exactly where along the supply chain processes can be made more efficient or time and costs can be saved. This may include targeted staff training, diversifying vendors to meet quotas, or examining necessary (or unnecessary) business practices.
The bicycle company identifies it has too few vendors supplying the parts needed to meet its required manufacturing quotas. So, it decides to invite suppliers to bid for additional contracts using RFx software.
An audit trail helps businesses understand where they are complying with government procurement standards and regulations – and where they’re failing.
For example, the bicycle business reviews its audit trail and is confident it is meeting procurement best practices. As a result, it avoids potential fines from regulators and loss of custom from a damaged reputation.
How To Conduct a Procurement Audit
An audit is typically conducted by the procurement team, with a dedicated incident manager who is the main actor responsible for carrying out the process and leading the team.
There are seven key steps in the procurement auditing process. Here’s how each one contributes to a comprehensive and valuable audit:
The audit should reveal key changes that need to be made across the supply chain and the entire source-to-contract process. When stakeholders and management are involved from the start, these changes can be implemented at the earliest opportunity.
Identify Problem Areas
There are three main procurement categories that the auditing team must consider:
With each area requiring a detailed audit, this method of viewing the procurement process can focus attention on critical areas and help inform a planned method of attack.
Purchase Order Forms
Purchase order forms are official documents in which a company agrees to buy from a vendor and outlines the terms of the agreement. Examining these documents allows businesses to identify inefficiencies and instances of procurement fraud.
When spotting an anomaly in purchase order forms, it’s best to flag the suspicious activity as soon as possible.
Keeping all supplier communications and contracts in a single intuitive RFx platform allows for a comprehensive audit trail – making this stage seamless.
The next step is to review how vendors are selected, and the steps involved in that process. This may reveal faults in the supplier selection process.
Sometimes red flags in vendor selection reveal instances of fraud. For example, are suppliers being offered contracts that don’t quite match that vendor’s performance or experience?
The entire procurement process should then be carefully reviewed, focusing on the amount of time spent on each step – from identifying goods needed to receiving them from contracted vendors.
Any steps completed quicker than expected should be investigated for potential regulatory oversight. And similarly, those that take too long may represent an inefficiency that can be streamlined to save time and costs.
Follow The Leads
At this stage, the procurement team will have established key insights and leads that need pursuing. This may include anything from contracts that seem to be above the expected cost to procurement fraud red flags.
It’s time to investigate each of these leads, with senior managers and stakeholders given access to the details and any relevant employees, vendors and partners. This step is crucial in limiting inefficiencies, improving compliance and increasing value.
Write a Report
Now that all potential leads have been subject to a thorough investigation, it’s time to put the findings into a report.
These reports should contain information about the problems encountered, each step taken to investigate and remedy the problem, key dates and further suggestions for preventative measures in the future.
This step is important in leaving a clear and traceable audit trail to protect the business and demonstrate its commitment to legal procurement practices.
How Often Should Procurement Audits Be Completed?
Procurement audits be conducted regularly to help businesses remain compliant and achieve the greatest value from their purchasing decisions.
Industry best practice suggests that procurement audits should be conducted at least four times a year, but that monthly audits are the most valuable.
Afresh and comprehensive audit should also be conducted whenever a major change takes place in the business, such as the onboarding of a new supplier or the awarding of a new contract.
It’s essential to maintain this process as fraudsters can act unnoticed when the procurement process isn’t given adequate attention. This also helps businesses to vet and blacklist inefficient or fraudulent vendors.
Procurement Audit Best Practices
Here, DeepStream looks at industry best practices to keep in mind when conducting a procurement audit:
Hold Regular Meetings
Communication is key, and part of maintaining effective communication is regular meetings with all key parties to raise any updates or amendments to the procurement processor any red flags or inefficiencies that need investigating.
Regular meetings keep staff on track and allow the team to spot any inconsistencies in both data and their workflow to make the auditing process a smoother experience.
Team collaboration also allows businesses to keep the most relevant parties – those with key knowledge of specific stages of the procurement process – in the loop at every stage, to remedy inefficiencies as soon as they arise.
Take note of every aspect of the procurement audit process and any anomalies that raise suspicion. This can be a clear red flag for potential fraud or simply financial figures, communications or deadlines that don’t meet the business’ standards or requirements.
By recording official reviews across the entire procurement audit process, stakeholders remain aware of all areas of concern or potential weaknesses in the purchasing process that can be streamlined and improved.
This can be simplified using a single eProcurement platform that streamlines all source-to-contract data and communication in a single software for effortless auditing.
Consider Industry Guidelines
It’s important to consider key industry guidelines throughout the audit process. This not only helps to identify any suspicious activity or red flags but also provides clear next steps on how to improve the situation.
This allows businesses to avoid fraud and other illegal activity, limit inefficient spending and improve relationships with partners.
Tools & Technologies for Procurement Audits
Several key technologies and tools can help make the procurement auditing process a smooth and simple one. These include:
Collaborative Online Workspaces
Collaborative working tools and communication software (such as Slack and Microsoft Teams) are essential in aligning the goals of procurement teams.
Accessing a collaborative online workspace boosts productivity and helps facilitate a strategic approach to the auditing process – allowing all key team members and stakeholders to stay updated with the latest information and tasks and share key concerns and insights to streamline the project.
RFx software is a digital, cloud-based system that streamlines the entire source-to-contract process in a single intuitive and accessible platform.
The platform provides a clear, accurate and regular audit trail, as well as keeping all supplier communications, bids and more in a single hub.
DeepStream’s RFx solution is secure and reliable and gives you access to all the information you need at the touch of a button – allowing you to make important decisions quickly and confidently.
Frequently Asked Questions:
Why are Procurement Audits Useful?
Procurement Audits can help focus the procurement process, avoid higher costs from unnecessary spending and identify red flags that could potentially be signifiers of fraud – all while improving a business’ relationship with its vendors.
What are the Main Principles of a Procurement Audit?
Goods and services must be procured at the right price from the right source.They need to be of agreed quality and in the right quantity. They also need to be delivered at the right time to the right location.