MANAGING the risk of non-compliance with contractual requirements has therefore significantly increased in importance. The irony is, under most corporate risk management structures, contract risks are often not addressed using a systematic approach.
In a recent Ernst & Young survey of 140 financial executives, only 52% of respondents considered their contract risk controls either very effective or effective. Of the remaining respondents, 22% did not know how effective their controls were and 26% of respondents indicated that their controls represented an opportunity for improvement.
These survey results reinforce the need to focus on improving contract risk controls. Without proper, or properly used, controls and monitoring systems, the parties to a contract must trust each other’s integrity, systems, interpretations and calculations. However, trust cannot replace good corporate governance. While trust between two parties under a mutual contract is good, it is not – nor should it be – the sole defence against contract risk. More than three-quarters of contractual reviews with third parties identify errors and contractual non-compliance. Even long-term contractual relationships can therefore benefit from a periodic objective review.
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