Reinvent Procurement with This 6-Step Audit Guide for CPO s

You've meticulously crafted procurement procedures, automated approvals and built robust vendor risk profiles. "We've got this covered," you think. But is a quarterly review of your procurement history really necessary?

Consider this: even industry giants are susceptible to fraud. A single perpetrator swindled Facebook and Google out of a staggering $100 million over a few years.

Here's how to avoid a similar fate. This step-by-step guide to conducting a procurement audit will help you maintain buying compliance, optimize purchasing processes, and identify potential irregularities or fraud.

What is a Procurement Audit?

A procurement audit is a regular assessment that ensures your procurement procedures are followed, identifies opportunities to streamline buying processes, and most importantly, detects irregularities or potential fraud.

Also Read: How to Detect and Avoid Procurement Fraud

With companies procuring everything from complex software suites to diverse material goods, gaps between policy and practice can emerge. A procurement audit acts as a check-up, verifying that everything is functioning as intended. It seeks answers to questions like:

• How well does our actual purchasing align with established procedures?
• Can all purchases and payments be accounted for, and are they legitimate expenses?
• Which processes require modification, adoption, or improvement?

For effectiveness, procurement audits should be conducted regularly (quarterly is typical for most businesses) and follow a consistent process to ensure reliable comparisons.

Six Steps to Conducting a Procurement Audit

Step 1: Define Your Objectives and Scope (Focus on Measurable Impact)

Find Common Pain Points: Identify the common pain points in procurement within your industry. Are maverick purchases a problem? Do suppliers need to perform better? Is there a lack of transparency in procurement?

Quantify Goals: Avoid generic goals. Let them be SMART (Specific, Measurable, Achievable, Relevant and Time-bound). For example, ‘Cut maverick expenditure by 15% in the coming fiscal year’ or ‘Improve on-time supplier deliveries by 10% in the next three months.’

Step 2: Assemble Your A-Team (Internal Expertise + Targeted External Support)

Internal Powerhouse: Look for procurement staff who are long-time employees: they typically know your supply chains and the challenges you face.

External Auditor Selection (Consider Size and Needs):

For Smaller Organizations: Collaborate with your existing accounting team and ensure that they have procurement audit capabilities.

For Larger Organizations or Specialized Needs: Outsource to a specialist-certified external audit firm with a strong track record in your industry. Find audit firms that utilize audit methodologies relevant to your organization’s size and complexity.

Step 3: Gather Information (Data Analysis is Key)

Data Deep Dive: Review historical audit reports, spending data (both invoice approvals and maverick spending instances), and supplier performance metrics (on-time deliveries, quality control issues, etc.) to identify patterns and areas of concern. Create reports based on the data using available visualization tools.

Stakeholder Interviews: Look beyond the data. Interview requisitioners, accounts payable staff and other stakeholders to understand process bottlenecks and areas of improvement. Use a structured interview questionnaire to gather insights.

Step 4: Analyze Findings and Develop Actionable Recommendations

Workflow Assessment: Take a step back and assess your procurement workflow, determining where it can be optimized. For example, perhaps you can automate the generation of purchase orders (PO) for standardized transactions and set up a self-service portal for the procurement of low-risk, low-value goods.

Optimizing Supplier Management: Review supplier contracts (often done for a specific project, but it makes sense to do this for all active contracts), price structures, performance clauses, payment terms, etc. and renegotiate areas where possible. You can also consolidate vendors when it makes financial sense to do so. Create a program for Supplier Performance Management to continually review and assess supplier performance.

Compliance Review: Make sure that the function complies with internal policies (such as purchase order authorization limits) and external regulations (ex, anti-bribery laws) to reduce the risk of financial penalties.

Also Read: Supply Chain Audit: Process, Benefits and Best Practices

Step 5: Deliver Recommendations and a Clear Action Plan (Focus on ROI and Implementation)

Quantify Savings Potential: Don’t just make recommendations. Estimate the cost savings that could result from each one, so that your plan will provide a more compelling ROI.

Prioritization for Impact: Focus on high-impact recommendations that address the most critical issues and opportunities for cost savings. Consider a risk-based approach, prioritizing recommendations that address areas with the highest potential financial impact or compliance risk.

Detailed Action Plan: Develop a clear and actionable plan outlining specific tasks, responsible parties, and timelines for implementing the recommendations. This ensures a smooth implementation process and facilitates progress tracking.

Step 6: Follow-Up and Continuous Improvement (Monitor, Review and Adapt)

Continuous Progress Monitoring: Continually check the progress of the action plan. Take note of successes and challenges. Schedule regular meetings with key stakeholders to assess progress and identify areas for course correction.

Ongoing Reviews: Schedule regular meetings on a quarterly or bi-annual basis to discuss the status of the action plan, address residual concerns and identify additional opportunities for improvement in the procurement function.

Continuous Improvement Culture: You should conduct regular procurement audits to maintain a culture of efficiency and continuous improvement throughout your procurement function. It is ideal to conduct audits at least once a year, or more often if there have been significant changes to your procurement processes, regulations or supplier base.

To Sum Up

With the steps mentioned above, you can use procurement audits to drive better performance in your procurement organization – and increase savings. Remember that a successful procurement audit is not just about identifying problems, but also about implementing effective solutions and fostering a culture of continuous improvement.

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