By Chrissie A. Powers, CPA/CFF, CFE, CVA
A vendor audit clause should be added to your purchase order allowing you the right to examine the records of a vendor to determine if a fraud or violation of the Company policy has occurred. This is essential to proving most kickback schemes. The most effective way to obtain proof of a vendor fraud or a kickback scheme is an on-site audit of the vendor's books and records.
The clause might be worded as follows on a purchase order: "Seller shall establish a reasonable accounting system, which enables ready identification of seller's cost of goods and use of funds. Buyer may audit seller's records anytime before three years after final payment to verify buyer's payment obligation and use of buyer's funds. This right to audit shall include subcontractors in which goods and services are subcontracted by seller. Seller shall ensure buyer has these rights with subcontractors."
Some clients include the Right to Audit Clauses in their standard vendor contracts in addition to the basic right-to-audit clause included in the purchase order. This allows the buyer a much greater opportunity to expand definitions and include other compliance provisions for the vendor.
If a Right to Audit Clause doesn't exist, you should still request that the vendor submit to an audit. Many times, the vendor will often voluntarily agree to the audit. If the vendor refuses to submit to the audit, this is a Red Flag that the vendor may have something to hide.
The Right to Audit Clause allows the fraud examiner or auditor to look for: kickbacks, gifts and gratuities to company employees, faulty or inferior quality of goods, conflicts of interest, commissions to brokers or others, short shipments, goods not delivered, etc.
Right to Audit Clauses are a necessity in business. They help to control fraud and abuse in companies by simply affording the discovery devices that may only be available through expensive lawsuits.
If you suspect fraud, Powers Forensic Accounting, LLC can investigate the allegations. If you have additional questions or concerns regarding fraud, don't hesitate to contact us at 614-745-5192.