Introduction

Distributor audit is the process wherein the company appoints an auditor to verify the books of its distributors. Audits can be performed by external audit firms (independent auditors) or by internal audit teams appointed by the management. In this article we will learn why is distributor audit being undertaken, what are the audit goals and what will be the audit conclusion in these circumstances. Distributors are basically the company which distributes/provides the goods/services of another company (basically the manufacturer) to the final consumer for which another company pays the distributor a share of its profit margin.

What is a Distributor Audit?

A distributor audit refers to a process of examining and assessing the activities, operations, and financial records of a distributor by an independent party/internal audit team. The purpose of a distributor audit is to ensure that the distributor is complying with contractual agreements, industry regulations, and best practices. It also helps in verifying the accuracy of financial transactions, inventory management, and overall business practices.

It is a systematic inspection and assessment of a Distributor’s operations and whether he is conducting business according to the terms of the contract, as well as evaluating systems and controls to ensure that they meet established criteria and standards.

A. Distributors audit primary goals may include:

Compliance: A distributor audit is performed to ensure that distributor records are maintained in conformity with all applicable laws, rules, and industry standards. This reduces the risk of legal and regulatory difficulties for organizations.

Quality assurance: Businesses rely on distributors to provide goods and services that meet stringent quality requirements It is the process of ensuring that the distributor's products or services satisfy the required quality standards specified in contractual agreements.

Risk management: It is the process of identifying and mitigating any risks associated with the operation of a Distributor, such as data completeness, data security concerns, or business continuity. This includes financial risks (distributors fraudulently earnings more Profit), operational risks, and other possible supply chain challenges.

Performance Evaluation: Examining the distributor's overall performance in terms of meeting deadlines, providing quality services, and timely collection of debts from debtors.

Process Improvement: Determining where the distributor's systems and processes need to be improved to increase the effectiveness and efficiency of products or services.

Information Safety: With the rising importance of data security, businesses perform distributors' audits to evaluate their suppliers' information security practices and ensure the protection of customers' sensitive data.

Particulars

Verification

Compliance

Checking statutory compliance like GST returns, TDS returns & payments, labour compliance, etc.

Quality Assurance

1. Whether correct products and services are delivered

2. Whether the product and services are delivered on time

Risk Management

1. Checking completeness of purchase records from the seller's Point of view (Reconciliation of purchase with company sale)
E.g.- Supplier sales records matching with purchase records of buyer

Performance Evaluation

1. Whether timely quality testing checked or no

2. Timely debtor collection Analysis

3. Timely after-sales services

Process Improvement

Advice distributor about loopholes and leakage of revenue

B. To eliminate the deficiency accrued in the audit findings

1. Training and Development: Provide training sessions or workshops to address knowledge gaps or deficiencies identified during the audit. This could include product training, compliance training, or training on updated processes.
2. Enhance Quality: If quality standards have not been maintained by the distributor, then controls are advised by the company from the service point where the distributor provides service on goods sold this helps in the retention of customer.
3. Improvement in accounting and compliance: Advice proper recording of all the transactions and mandate the process for compliance (e.g. GST or any applicable law) subject to industry structure.
4. Dispute Resolution Mechanisms: If during audit leakages are found that the distributor charges extra profit then recovery of such profit is done and changes in agreement are made with stringent rules which the distributor has to comply with to continue with the distributorship. Establish clear dispute resolution mechanisms in the distribution agreement to address any disagreements or conflicts promptly. This can prevent issues from escalating and disrupting the partnership.
5. Regular Monitoring and Reporting: Implement a system for regular monitoring and reporting to track progress in addressing deficiencies. Set up periodic check-ins to review performance metrics and discuss any ongoing challenges.

Non-compliance with laws by distributors can have significant impacts on a company. Let's have a look at a case study to illustrate this:

Example:

Generous Electronics Enterprises and Distributor Non-Compliance

Generous Electronics Enterprises is a multinational company that sells electronic products worldwide. They have a network of distributors responsible for selling and distributing their products in various regions.

Scenario:

The distributor AK Enterprises in Country America, where Generous Electronics Enterprises has a significant market presence, AK Enterprises engages in practices that violate local environmental regulations. They were mishandling electronic waste generated from the products, leading to environmental pollution. Due to this non-compliance at the AK Enterprises' end, they had to face the legal consequence of the regulatory authority initiating legal action, the penalty and banned was imposed for 6 months for not supplying goods in that specific region and this has led to damage the business reputation as a result of negative publicity, consumers may shift their preferences to competitors.

Conclusion:

In conclusion, conducting distributor audits is critical for businesses to manage risks, maintain quality standards, verify compliance, and develop strong, dependable supply chains. It also helps to develop excellent connections with suppliers and vendors while supporting the company's broader business objectives. Essentially, auditors probe leakages, and excess margins are recovered from distributors by the company based on the auditor's findings.

By taking a proactive and collaborative approach, companies can work with their distributors to eliminate deficiencies and strengthen the distribution network for long-term success.

Authors:

Yash Thakkar.

Associate Consultant | Email: yash.thakkar@masd.co.in | linkedin.com/in/yash-thakkar-06664b207

Punit Ruparelia

Director | Email: punit.ruparelia@masd.co.in |
linkedin.com/in/punit-ruparelia-62bb97153