Definition of audit rights

Audit rights clauses are a contractual provision that grants one or both parties in a commercial transaction the ability to access, review, and verify the other party’s records, processes, and performance metrics to ensure that obligations are being met.

When is it appropriate to use audit rights clauses?

The audit rights clause, at its core, is a verification mechanism to ensure that a party is meeting its obligations. It promotes transparency, accountability, ultimately with the objective of minimising risk related to underperformance. The auditing party will generally look to increase the scope of the audit, by pushing towards ‘full’ or ‘unrestricted’ access to data, premises, records, and processes. Of course, the party being audited will generally look to contain the scope to what is strictly necessary. 

While contracting parties often want to ensure their counterparties are complying with the terms of an agreement, an audit rights clause is not always necessary. In many situations, both parties can rely on documented evidence provided in good faith, without requiring deeper access to internal systems or data. 

However, in highly regulated sectors — such as financial services — audit rights clauses are more pertinent. A financial services provider, for instance an acquiring bank with payment terminals, may be required to meet strict up-time requirements (think: SLAs), fulfill compliance obligations (such as PCI/PIN), and undergo vulnerability testing (for example, SOC 2 or ISO 27001). Failure to comply with these standards can result in significant penalties or fines, making periodic audits essential to ensure that key vendor contracts also satisfy those regulatory and industry requirements.

What is typically required for an audit?

Audit Rights typically require the audited party to maintain accurate records and provide reasonable access to documents, facilities, and information. Some data must be stored for several years after it has been collected. This could be anything from a payment receipt, to a quality assurance score. 

An independent third-party auditor may be used to conduct the review, and the contract can account for specific procedures or schedules for the audit to take place. 

What about confidentiality?

Confidentiality obligations usually apply to any proprietary or sensitive information disclosed during the audit. These obligations protect both parties by restricting how audited materials can be used, ensuring sensitive data is not misused or shared with unauthorised entities.

What role does contract management play?

A contract lifecycle management (CLM) solution like Docfield can be an amazing tool in monitoring the performance of a vendor by summarising key contract data in dashboards. Data points set out in the contract, like up-time SLAs or delivery terms, can then easily be compared alongside the actual performance of the vendor to spot discrepancies. In that sense, a CLM can function as the single-source-of-truth for all contract-related matters; from ple-closing matters like negotiation to post-award monitoring!