Internal audit in procurement is a function that ensures the integrity, efficiency, and compliance of an organization’s procurement activities. By systematically evaluating procurement processes, internal auditors help identify risks, inefficiencies, and non-compliance with established policies and regulations. Team’s objective assessments provide valuable insights into the procurement function, fostering transparency and accountability. This blogpost is about how internal audit can support compliance within the procurement function.

Recommended reading about Procurement Compliance:

1. The Pillars of Procurement Compliance.
2. Understanding Non-Compliance. Stakeholders’ Reluctance
3. Fostering a Compliance-Driven Culture

1. Assessment and Identification of Risks

Internal audit in procurement plays a critical role in assessing the procurement processes to identify risks and areas of non-compliance. By conducting regular audits, they can pinpoint vulnerabilities in procurement practices, such as inadequate supplier vetting, non-adherence to procurement policies, or weaknesses in internal controls.

2. Review of Policies and Procedures

Internal auditors review the procurement policies and procedures to ensure they are up-to-date, comprehensive, and aligned with best practices and regulatory requirements. This helps in identifying any gaps or ambiguities that might lead to non-compliance.

3. Monitoring and Reporting

An internal audit in procurement involves continuous monitoring of procurement activities and reporting findings to management. This includes tracking compliance with contract terms, verifying the accuracy of financial records, and ensuring adherence to ethical standards. The audit reports provide insights into compliance levels and highlight areas needing improvement.

4. Recommendations for Improvement

Based on their findings, internal auditors provide actionable recommendations to enhance compliance. These may include suggestions for process improvements, better documentation practices, enhanced training programs for procurement staff, and stronger controls over procurement activities.

5. Follow-Up on Audit Findings

A crucial part of the audit process is the follow-up on previously identified audit findings. Internal auditors ensure that corrective actions are implemented effectively and within the specified time frames. This follow-up ensures continuous improvement and compliance with procurement policies.

6. Training and Awareness

Internal audit can support compliance by helping to develop and deliver training programs for procurement staff. These programs can cover topics such as the importance of compliance, how to follow procurement procedures correctly, and how to identify and mitigate risks.

7. Ethical Oversight

Internal auditors help enforce ethical standards within the procurement process. They monitor for potential conflicts of interest, fraud, and corruption, ensuring that procurement activities are conducted with integrity and transparency.

8. Enhancing Accountability

By holding various stakeholders accountable for their roles in the procurement process, internal audit ensures that there is a clear responsibility for compliance. This includes tracking who is responsible for specific procurement activities and ensuring that they adhere to policies and procedures.

Example of How Internal Audit in Procurement Supports Compliance:

Scenario: An internal audit reveals that a significant number of purchase orders (POs) are being processed without the required approvals, leading to unauthorized spending and potential fraud.

Audit Findings:

• Lack of adherence to the PO approval process.
• Inadequate documentation and record-keeping.
• Insufficient training for procurement staff on approval requirements.

Audit Recommendations:

1. Implement a more stringent approval workflow within the procurement system to ensure all POs are properly authorized.
2. Conduct regular training sessions for procurement staff on the importance of the approval process and how to adhere to it.
3. Enhance documentation practices to maintain a clear audit trail for all procurement transactions.

Follow-Up Actions:

• After six months, the internal audit team conducts a follow-up review to assess the implementation of recommendations.
• They find that the approval workflow has been successfully integrated, staff have completed the training, and documentation practices have improved.

Result: The compliance rate for PO approvals increases significantly, reducing unauthorized spending and enhancing overall procurement compliance.

By systematically addressing audit findings and implementing recommended improvements, organizations can strengthen their procurement processes and ensure a higher level of compliance with policies and procedures.

It’s important to recognize that internal audit in procurement involve examining the practices and behaviors of both the procurement organization and its stakeholders.

Auditing Stakeholders

Focus Areas:

1. Compliance with Procurement Processes: Ensures that stakeholders (e.g., departments requesting purchases) follow the established procurement policies and procedures.
2. Supplier Performance: Evaluates whether suppliers are meeting their contractual obligations and performance standards.
3. Contract Adherence: Checks if stakeholders are adhering to the terms and conditions of contracts with suppliers.
4. Transparency and Fairness: Assesses the fairness and transparency of stakeholder interactions with suppliers, including the selection process and conflict of interest management.
5. Usage and Justification: Reviews the justification for procurements made by stakeholders and the actual usage of procured goods and services.

Benefits:

• Improved Accountability: Ensures that stakeholders are accountable for their procurement decisions and actions.
• Enhanced Supplier Management: Identifies areas where supplier performance can be improved or where supplier relationships need to be better managed.
• Better Resource Allocation: Ensures that resources are used effectively and for their intended purposes, reducing wastage and optimizing value for money.
• Compliance with Regulations: Ensures stakeholders comply with external regulations and internal policies, reducing legal and financial risks.

KPI Internal Audit Findings Compliance Rate

Definition: The percentage of audit findings that are addressed and resolved within the stipulated time frame.

Measure: (Number of resolved audit findings / Total number of audit findings) * 100 Sample Calculation:

If 20 out of 25 audit findings are resolved within the time frame:

Audit Findings Compliance Rate=(2025)×100=80%Audit 

Findings Compliance Rate=(2520​)×100=80%

Internal Audit in procurement: Support or Threat?

Perception of Internal Audit by Procurement Department:

Support:

• Opportunity for Improvement: Internal audits should be seen as an opportunity to identify areas where processes and controls can be enhanced. By collaborating with auditors, the procurement department can leverage their insights to improve efficiency, reduce risks, and achieve better outcomes.
• Risk Mitigation: Auditors help in identifying potential risks before they become significant issues. By addressing these risks proactively, the procurement department can prevent costly mistakes and ensure compliance with regulations and policies.
• Enhanced Credibility: Regular audits that result in actionable improvements can enhance the credibility and reliability of the procurement department within the organization. Demonstrating a commitment to continuous improvement builds trust with other departments and stakeholders.

Threat:

• Fear of Exposure: Some staff might perceive audits as a threat due to fear of exposure of non-compliance or inefficiencies. This fear can lead to resistance and lack of cooperation.
• Misunderstanding of Objectives: If the purpose and benefits of audits are not clearly communicated, procurement staff might view audits as punitive rather than constructive.

Storytelling to Build a Strong Challenger

Creating a Positive Narrative Around Internal Audits:

1. Emphasize the Role of Partnership:

• Narrative: Position internal auditors as partners in the journey toward operational excellence. Communicate that their role is to support and enhance procurement processes, not to punish or find faults.
• Example: “Our internal auditors are here to help us identify opportunities for improvement. By working together, we can streamline our processes and achieve greater efficiency.”

2. Highlight Success Stories:

• Narrative: Share examples where internal audit findings have led to significant improvements or cost savings. Use these stories to illustrate the tangible benefits of audits.
• Example: “Last year’s audit revealed that we could save 10% on our annual spend by renegotiating supplier contracts. Thanks to their insights, we’ve implemented new strategies that have already shown positive results.”

3. Foster a Culture of Continuous Improvement:

• Narrative: Promote a culture where feedback, including from audits, is valued as a tool for continuous improvement. Encourage staff to see audits as a regular part of the process of getting better.
• Example: “We are committed to continuously improving our procurement practices. The feedback from internal audits is crucial in helping us identify and implement best practices.”

4. Clarify the Value of an Outside Perspective:

• Narrative: Explain the importance of an external perspective in providing unbiased, fresh insights that can uncover blind spots and drive innovation.
• Example: “An external viewpoint helps us see our processes through a different lens. Internal auditors bring fresh ideas and identify areas we might overlook, helping us stay ahead in our field.”Internal audit in procurement is a function that ensures the integrity, efficiency, and compliance of an organization’s procurement activities.

Maintaining the Auditor’s Role and Fresh Perspective

1. Independence and Objectivity:

• Ensure that internal auditors maintain their independence and objectivity. They should have the freedom to report their findings without influence from the procurement department.
• Strategy: Establish clear protocols and communication channels that preserve the auditors’ impartiality. Regularly rotate audit teams to bring in fresh perspectives and prevent familiarity bias.

2. Ongoing Communication:

• Foster ongoing communication between the procurement department and internal auditors. Regular check-ins and updates can ensure alignment and understanding of audit objectives.
• Strategy: Hold periodic meetings to discuss audit progress, preliminary findings, and potential areas for improvement. This keeps the lines of communication open and reinforces the collaborative nature of audits.

3. Training and Development:

• Invest in training for both auditors and procurement staff. This ensures that auditors stay updated on best practices and industry standards, and procurement staff understand the audit process and its benefits.
• Strategy: Conduct joint training sessions and workshops that focus on the value of audits, compliance requirements, and how to implement audit recommendations effectively.

4. Feedback Loop:

• Establish a feedback loop where procurement staff can provide input on the audit process and auditors can share insights on industry trends and best practices.
• Strategy: Implement a formal feedback mechanism where both parties can share their experiences and suggestions for improving the audit process. This promotes mutual understanding and continuous enhancement of the audit program.

By framing internal audit in procurement as a supportive and collaborative process, the procurement department can harness the full potential of audit insights to drive continuous improvement and achieve operational excellence. Maintaining the auditors’ independence and objectivity ensures they continue to provide valuable, unbiased perspectives that enhance the overall effectiveness of the procurement function.

The agenda of a CPO (Chief Procurement Officer) and key management processes in a Procurement department. How to convert the company strategy to a procurement strategy, content of a procurement strategy, category management and more. Try our Procurement management program.

Note: Illustration to the blogpost “Internal audit in procurement – explained” was created by Chat-GPT on June 6, 2024.

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