CFOs need to take a long hard look under the hood when it comes to asking if their Channel Sales are Audit ready. Why? Because they might be more than a little shocked at what they discover.
Increased scrutiny is flooding in from regulatory watchdogs around the globe who expect organizations to already have in place proven third-party risk management methodologies and oversight programs. It’s also emanating from within. Therefore, internal audit and compliance teams are seeking to emulate the level of inspection postured by external regulators.
In a recent Deloitte survey, a staggering 83% of organisation respondents reported they had experienced a third-party incident in the past 3 years. Furthermore, 35% stated they experienced a moderate impact on customer service, company brand reputation, financial position and/or regulatory compliance. Whilst 11% reported a severe impact on the aforementioned areas.
The use of channel partners is expanding exponentially. Partners are quickly becoming a critical component of the go-to market strategy for companies looking to scale and expand into new markets, segments and geographies. Consequently, some companies have turned their entire sales operation over to the channel. However, what we often forget is that most vendors have little to no visibility of the risks posed by their channel partners. With that risk having the potential to expose them to significant financial and/or reputational risk. This is primarily due to the partner relationship being completely managed using multiple, disconnected spreadsheets, ad-hoc and unstructured business processes, and an email approval process lending itself to high levels of non-compliance and audit exposure.
To counter or mitigate the potential risk posed by channel partners, CFO’s need to treat the channel as an extension of their internal sales and marketing operation. Concrete steps must be taken to assess the audit readiness and compliance stance of their channel operations. For instance, extending the audit review net to capture their partners. Understanding the partners’ readiness will help to determine what other considerations, gaps or exposure areas exist and need addressing.
As a start, below are three areas for a CFO to explore. All three are potentially problematic for both external financial regulators and internal audit/compliance teams.
Manual month-end financial reconciliation processes often lead to inaccurate:
– Journal entries
– Reporting delays at quarter end
– Lack of a compliant and transparent audit trail
– Significant overpayments to partners and
– Disputes with partners over payment.
It’s generally accepted that 10% is within the financial tolerance level for invoicing errors. That is to say, for a medium sized company, this can equate to upwards of $1.0 million annually in lost cash due to overpayments.
Firstly, ad-hoc email-based approval processes result in a loss of visibility to non-standard discounting practices by channel managers. Secondly, they result in inaccurate pricing and consequential invoicing errors. Importantly, this causes unnecessary credit memos and difficulties with producing compliant audit trails to ensure pricing approval policies are followed at every point in the process.
Using spreadsheets and email to track, approve and pay MDF funds in the form of commissions, rebates and marketing monies is filled with opportunities for potential errors, misuse and improper payments. And in the worst case; fraud and corruption. In short, vendors will be on the hook for their channel partners if an audit finds these funds to be improperly used. Consequently, this exposes them to substantial financial liability and irreparable reputational damage in the market place.
To sum up, as companies look to expand their revenue streams and profits by embracing channel partners, CFO’s need to be fully aware of the potential underlying risk posed by these partners. Since CFO’s are a huge part of the decision process, they must be confident that the risk is being managed properly by the partners responsible for generating revenue and profit growth. However, tight process and automation throughout the channel can help provide complete visibility to potential risk areas, long before they become problematic during a channel sales audit.
To learn more about how market leading vendors automate and manage their channel programs, contact Channel Mechanics today and transform your channel tomorrow.