A complete Guide to Internal Procurement Audit Program
In 2018, a fraudster duped Google and Facebook out of a combined $128 million. The details of how he managed to do it are disturbingly easy. According to the investigation, the suspect simply sent in fraudulent invoices for services that were never rendered, and surprise, Facebook’s finance team paid up.
There could have been only one way those funds were tracked and recovered after the fact, and that would be during a procurement audit.
Now, it’s easy to think that’ll never happen to you. You have smarter employees, you say. And you’re not a billion-dollar tech company with a lot of cash to lose. You just don’t see this happening to your company.
But, did you know that for companies with fewer than 100 employees, billing schemes are the second most prevalent type of fraud?
But, what is procurement?
It’ll help us to refresh our understanding of how procurement functions before diving into the process of auditing it.
Procurement is the process of acquiring products and services an organization requires for running its day-to-day operations.
According to McKinsey, organizations spend between 30-70% of their revenue on procurement. This volume of cash flowing through one department creates ample opportunity for fraud and unscrupulous practices.
This is where procurement audits come in.
What is a procurement audit?
Procurement audit entails periodically reviewing procurement contracts, processes, and history with vendors to ensure accuracy, compliance with the terms stipulated in your contract, and improve efficiency.
What is the essence of procurement auditing?
Procurement auditing helps organizations fulfill three key functions,
- Procurement empowers you to uncover and eliminate fraud across your procurement system. By taking a holistic look at your procurement history, it’s easy to identify irregularities on time.
- Compliance. Periodic auditing reveals whether your suppliers have been keeping to the terms stipulated in the contracts so you can either terminate non-performing contracts or chart a way forward.
- Efficiency. By taking an in-depth look at your procurement machine, it’s easy to what needs to change and where you can get the same or even better outcomes by trimming down input.
Procurement auditing, like every other form of auditing, reveals issues with your procurement and identifies opportunities for change.
How to run a procurement audit?
A procurement audit holds significant benefits for your organization. But don’t be fooled. Procurement auditing is an intensive process that digs into the core of your systems and processes to show you what’s working and what needs to change to manage your procurement better.
You’ll have to analyze countless documents, liaise with stakeholders, and build a detailed report of all your findings for higher management’s consideration. Here’s a breakdown of what it takes to run a procurement audit.
1. Involve managers and direct stakeholders
Procurement tends to present as a rather technical field.
You get to manage a lot of data, move that data from place to place, process it into information, and make decisions based on the conclusions you reach
But don’t ignore the human factor that makes it all work. Your first port of call in your procurement auditing journey is to have 1:1s or even a general meeting with procurement managers and direct stakeholders across your organization.
You aim to capture their on-the-job perspective and get their analysis on what’s working, what’s not, and what could be improved to make your procurement run more efficiently.
This helps you on your auditing quest since you now have a better idea of what to watch out for.
Of course, you still have to complete your audit from scratch and not take anyone’s word for it (which is why it’s called an audit) but looping managers into the process initially gives you pointers on what to emphasize throughout the auditing process.
2. Focus on problem areas
There are three main branches to procurement auditing – auditing procurement contracts, processes, and finally, procurement history to evaluate performance over time.
All these need a holistic approach to uncover what’s working and what’s not and get down to fixing them right away.
Better still, you can leverage the feedback from procurement managers and stakeholders to identify problem areas within your procurement process and determine what needs to be fixed faster.
Now, this doesn’t in any way remove responsibility from having to audit end-to-end, but rather, helps you focus your effort on known issues so you can fix them before hunting for hidden problems.
3. Audit requisition and purchasing forms
Purchase orders are filled out whenever there’s inventory the procurement department is ordering.
This constitutes opportunities for unscrupulous employees to manipulate figures and commit fraud.
Most especially, given the volume of purchase orders, your procurement department may have processed, it’ll be impossible to analyze each individual document.
What you do is select samples randomly from across several vendors and review the details on each one. Check for signatures, notes, order details, pricing, and cross-check figures against prices noted in the contracts for each vendor.
4. Vendor selection audits
Your organization presumably has criteria for vetting vendors before putting them on your procurement roster. These might include risk ratings, performance data, pricing, and other competitive analysis to get the best offer possible from a pool of suppliers.
This is another area that’s prone to the risk of fraud since contacts within your organization may tweak standards for certain vendors to help them qualify without meeting agreed benchmarks.
During the auditing process, here’s where you review your vendor ratings and analyze each vendor to determine whether they measure up to the selection standards. Record your findings as you progress.
5. Audit procedures and processes
Review the processes employees across your organization implement while making purchase requisitions, orders, or managing other day-to-day procurement tasks.
- Are they unnecessarily burdensome?
- Could they be simplified and still get the same outcomes? Do employees skip essential steps?
- Do employees have feedback on how to make procurement processes more efficient?
Assess how productive the processes your procurement has been based on to determine your best course of action.
6. Process your insights
With your research and auditing done, here’s the stage where you put it all into detail for higher management’s assessment.
For all the problem areas identified, you can rub minds with managers, employees, and direct stakeholders for ideas on how to fix them. For functional areas, you can brainstorm to determine what could be adjusted to get even better outcomes.
Take all the information you’ve gathered and take time processing and analyzing it with help from the stakeholders responsible for those data points who’ll help you make sense of it all.
7. Report your findings
After digging into your organization’s procurement, put it all in an orderly format for higher management and the senior stakeholders who’ll need it for their decision-making.
Use Kissflow for procurement magic
Doing a procurement audit is easier when you have intelligent processes, comprehensive data reporting, collaboration tools for engaging stakeholders, and maximum visibility into contract and transaction data.
Kissflow Procurement Cloud offers the one comprehensive solution that empowers you to manage your procurement from the get-go and minimizes the need to patch things up down the line.
With Kissflow Procurement Cloud, you can:
- Dissuade and even eliminate fraud with maximum reporting and visibility
- Create and manage intelligent processes with a few clicks
- Design your procurement operations to function as efficiently as possible