Many companies have secured appropriate audit provisions from their distributors. Companies have to exercise these audit clauses to maintain their credibility and commitment to risk mitigation, and should include distributors in the development of its annual audit plan. The key here is to conduct compliance and financial audits using a range of tools and strategies. A company that limits its audits to only formal, financial audits is unnecessarily restricting its audit capabilities to mitigate risks.
New and cutting-edge monitoring strategies are being developed to ensure that companies focus on high-risk distributors and flag those for follow-up inquiries and audits. With the advent of third-party management technologies, companies can free up resources to develop monitoring tools to capture and mitigate high-risk distributors.
To address distributor risks, companies rely on a mix of mitigation strategies, including comprehensive written representations and warranties; training; annual certifications; and monitoring of activities; and audit programs.
Companies have to move beyond “standard” contract provisions that have become “routine” over the last few years. Of course, a company has to secure appropriate compliance representations and warranties, and audit and termination provisions. As risk assessments and third-party strategies evolve, companies should look to tailoring additional provisions to the “specific” risk for a distributor.
Additional provisions have to be crafted for distributors’ relationships with sub-distributors, and sub-sub-distributors. Assuming that the company is only in privity with the distributor, the company has to leverage its relationship with the distributor to impose requirements on the distributor to exercise oversight responsibility of the sub and sub-sub-distributors in its distribution chain. In this area, companies should consider requiring distributors to seek company approval of a sub-distributor before engaging the sub-distributor to sell the company’s products.
This audit report focuses the distribution sales process, including: current distributor contracts and compliance with established parameters, credit memo data over a six-month period, and internal processes for validating distributors’ credit memo claims. Objectives include: evaluate internal control effectiveness/efficiency, identify areas for improvements, and provide analysis scorecard of the company’s practices against “best practices”.
The following are key observations noted during the review:
- Inventory validation counts on company inventory in distributors’ warehouses are not performed on a regular basis.
- Distributor audits have been performed in the past, but are not done on a consistent basis.
- Invalid ship-and-debit credits are being issued for invalid claims by distributors.