Inside Sourcing newsletters Undergoing a Merger or Acquisition? Conducting Contract Compliance Audits at Four Key Times Can Improve Transparency, Internal Controls, and Trust
As industries mature and disruptive technologies emerge, executives are facing a wave of financial challenges. Increased competition and global economic uncertainty are shrinking margins. Unpredictable regulation changes and geopolitical uncertainties add complexity to cost cutting strategies, such as outsourcing. All companies desire increased visibility and transparency within the supply chain.
To help counteract these pressures, many companies are exploring strategic mergers and acquisitions (M&A) to spur revenue growth and gain cost efficiencies.
According to a recent Deloitte survey of corporate executives, activity is poised to accelerate in 2017, perhaps significantly, extending the increase in deal-making seen during the final months of 2016. Further, 64 percent of respondents expect the deals to be larger, and more than 90 percent expect at least some of their company's M&A deals will involve acquiring targets operating principally in foreign markets - up from 77 percent in the previous survey.
The Financial and Operational Considerations of M&A
While the appeal of mergers is obvious, optimizing the benefits is a challenge for even the most sophisticated companies. Organizational restructuring, personnel changes, and the merging of corporate cultures and management can create conflict, which quickly distracts from a focus on cost savings.
A common phenomena during a merger is decreasing supplier transparency and increasing risk. Transferring third party contracts is a complicated task and difficult to coordinate. Cost containment, price optimization, and the logistical processes of assignment, termination, or renewal are often at odds. However, careful attention to supplier relationships and contract management can significantly enhance earnings.
Merging companies should be cognizant that a high level of activity and complexity can contribute to undetected overbillings and other types of non-compliance, which can erode the cost efficiencies gained from business combinations.
Four Times to Consider a Contract Compliance Audit during the M&A Process
Knowing that the dynamic environment of an M&A event can lead to undetected non-compliance, many executives are using contract compliance audits as an extra line of defense. The audits ensure transparency is maintained and earnings are protected. In addition, audits can proactively identify control gaps and process improvement opportunities that may have missed during due diligence.
For instance, if a company has recently been involved in a business combination, chances are that the new organization inherited conflicting contracts with third parties. How is the company making sure that suppliers are providing the most favorable terms and conditions to the new merged entity? An audit can validate that the third parties have accurately applied the most favorable pricing terms, and can identify any transactions occurring outside of the existing agreements.
There are four essential times during and after a business combination to utilize contract compliance audits:
During Significant Personnel Change. When a contract stakeholder changes roles, executives are performing audits to ensure that the new employee fully understands the commercial terms of the contract and potential gaps. Timeliness is paramount at this stage to ensure that "misunderstandings" do not persist undetected.
Prior to Ending Supplier Contracts. As a result of a merger or acquisition, suppliers of the two organizations are often consolidated to avoid redundancy, simplify product and service delivery, and achieve cost savings. Companies should perform contract compliance audits to identify overstated, invalid, or erroneous charges. They also allow for an effective transfer of contracts and information from the existing supplier to new third parties.
Prior to Contract Renegotiations or Sourcing Events. If an organization is renegotiating their current contract with a supplier or putting the business out to bid, audits performed prior to sourcing events can produce significant leverage. Contract compliance audits performed prior to sourcing events are also yielding long-term improvements in pricing, communication, accountability, and trust with suppliers.
Throughout Long-Term Supplier Contracts. Companies should execute audits during long-term contracts to strengthen every stage of the relationship. Periodic audits will help improve communication and clarify misunderstandings while mitigating the risk of financial loss and non-compliance over an extended period of time.
A well-executed audit of supplier contracts - during and after a merger or acquisition - will create greater transparency and contract alignment, strengthen supplier relationships, close potential control gaps, and detect missed savings opportunities.
Ultimately, by conducting contract compliance audits at four essential times, executives are realizing benefits that are helping them optimize the financial benefits of business combinations.
To learn more about how to develop greater transparency, accountability, and trust with key suppliers and other third parties, click here for more insights from SC&H Group's Contract Compliance Audit Services team.
About SC&H Group SC&H Group is an audit, tax, and consulting firm applying "expertise that works" to minimize risk and maximize value. SC&H Group's practices advise leading companies from emerging businesses to the Fortune 500 on accounting, tax, profitability, and business process solutions. Clients in all states and worldwide benefit from SC&H Group's commitment to delivering powerful minds, passionate teams, and proven results on each and every engagement. Learn more at www.scandh.com.