How many legal documents bind your business? When was the last time you evaluated the performance of your contracts? Are you in default? Is your counterparty in default? When is the right time to renegotiate the terms of an important contract? Are all your deals in writing? Are you even aware of all your contractual obligations?
If you answered “No” or “I don’t know” to any of these questions, you may be caught in the crossroads of an unexpected legal pitfall. A contractual compliance audit helps you prevent risks associated with failing to fill the gaps between the terms and performance of a contract..
What is contract compliance?
Compliance, alone, is the process of understanding your legal duties and implementing a dynamic system to help you monitor, meet, and exceed the performance of your obligations. Striving to exceed your compliance obligations is known as having created a culture of compliance.
Your set of legal obligations stem from the law, regulation, and (you guessed it) contracts! Contracts are the foundation of all businesses. Every business is founded in a combination of contracts that allow you create value for profit. Be it contracts of sale, employment, distribution, franchising, leases, insurance, vendor agreements, master services agreements, NDAs, promissory notes, or term sheets. A business should be visible through the combination of its contracts (even the shareholder’s agreement).
A contractual compliance audit is the process of evaluating your contractual stack to gain visibility of your legal obligations, assess their performance, and make the adjustments necessary to ensure you are compliant and demanding compliance from your counterparts.
What are the benefits of a contractual compliance audit?
Gaining confidence and transparency
Seeing your entire contractual stack helps you better understand your business’ status and evolution. It also helps you avoid shortfalls in performing or demanding compliance with material obligations or critical agreements. It adds a level of confidence for all company departments by allowing for collaborative efforts during the audit. You can gain trust with clients, vendors, and suppliers while attempting to fix any issues that may come up during the audit.
Improving business operations
An audit will help you identify any pain points in your contractual workflows. From lack of approvals to non-standard clauses, a contractual audit can be a granular as you need it to be. These improvements will reduce the number of non-compliant exceptions through time, thus improving how your business operates. You may also avoid going into default by failing to comply with a material contract or failing to renew a contract with a critical vendor.
An audit will help you corroborate your contracts with real life. You may verify billing and collection procedures, satisfaction with purchased goods and services, and fill any gaps arising from unwritten course of dealings. All of these can have an effect on your bottom line.
Preparedness and fiduciary obligations
Do you anticipate litigation? Perhaps an internal audit or shareholder request? A contractual compliance audit can prepare your business for upcoming turmoil and demonstrate duty of care and diligence being put to work.
Are all contractual audits the same?
Although they may entail similar layers, contracts have varying types. As such, each audit must be tailored to the specific needs of the party being audited.
What’s the process?
Value proposition: Define the anticipated intangible value and outcome of the contractual audit.
Scope and objectives: Define the proper scope and tangible objectives to achieve the desired value and outcome.
Time and budget: Like any project-based effort, establish timing, deliverables, KPIs, and a budget to create a manageable path forward.
Team and resources: Assess and identify the right team to complete the audit, define the roles of each team member, and implement any technological resources available to improve efficiency.
Manage and adjust: With the foregoing in place, you can start the audit, manage it throughout its lifecycle, and make adjustments when necessary.
Depending on the scope, a contractual compliance audit can require auditing communications such as emails, text messages, correspondence, and other documents such as invoices, bills of sale, and other relevant forms. These should be anticipated and identified during the definition of scope and objectives.
A contractual compliance audit can take many forms and have many purposes. Sometimes, your contractual stack may have gotten too large to manage. Other times, you anticipate litigation and wish to gain full visibility in preparation. Most times, you want to improve your procurement processes and a contractual audit will give you the required visibility to make better decisions and define better internal procedures.