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Contract compliance monitoring

Strategic alliances and partnerships with other companies are common and often essential in today’s marketplace. They can help companies gain competitive advantages in technological innovation, growth, pricing, profitability, rapid market capture, quality and global strategy.

Many contracts can appear to produce short-term or instantaneous ‘financial results’ by verifying and analysing whether the counterparty complies with the details of the contract. Often, such verification and analysis are conducted based on the provisions of the auditing authority in the contract. However, these ‘financial outcomes’ actually refer to revenue collection (for licencing or revenue-distribution contracts) or to cost reduction (for contracts related to sales and distribution, outsourcing, or procurement). These results have a direct effect on improving profitability and other aspects of corporate performance. In other words, contract compliance contributes to the improvement of ROI (return on investment) and cash flow.

Japan’s corporate governance places great importance on the interests of shareholders and other stakeholders. This makes your management’s commitment to contract compliance crucial for meeting expectations and acquiring strategic advantages.

PwC’s approach

In addition to royalty audits based on license agreements, PwC's forensic services practice also provides contract compliance monitoring for various types of contracts between companies. As an independent third party, we can check whether your business partners are conducting business or transactions in an appropriate manner as specified in the contract. This can help you identify previously unrecognised contractual non-compliance or differences in interpretation of contractual details. We can also leverage PwC's global network to conduct effective and efficient surveys of complex contracts that span multiple countries.

Business partners should be able to monitor contract compliance wherever they operate in the world. Our forensic services practice can help you mitigate relationships with high-risk counterparties in a cost-effective manner.

PwC’s approach

Examples of contract compliance monitoring

Joint venture contracts

Our client, a Japanese manufacturer, established a joint venture with a Chinese company in China, but the performance of the joint venture company was not as good as they had expected. 

Most of the employees of the joint venture were transferred from the Chinese partner company, and only those in charge of technology were seconded from the Japanese manufacturer. The Japanese manufacturer inquired about the causes of the slump and the state of management, but did not receive a satisfactory explanation. Therefore, PwC's forensic services practice carried out the following investigative procedures based on the joint venture contract.

  • We examined the discrepancy between the price of raw materials purchased through the Chinese partner company and the market price.
  • As the joint venture company was making other ongoing payments to the Chinese partner’s affiliates under various nominal terms, we inspected contracts and transactions with these affiliates to verify the purpose and the reasonableness of payments. As a result, we discovered the following issues:
    • Raw materials purchased through the Chinese partner company were purchased at a unit price approximately 10% higher than the average market price.
    • The joint venture was using the Chinese partner company’s IT infrastructure, which incurred large rental fees.
    • The joint venture company was paying a fixed monthly warehouse fee for warehouses owned by the Chinese partner company despite the fact that they were not using the warehouses.
    • Payments classified as ‘management fees’ were being made to the Chinese partner company, but further details of those services were not disclosed.

Based on these investigative procedures, our client was able to negotiate with the Chinese partner company to receive fair treatment.

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Supplier contracts

We provided contract compliance monitoring services with respect to supplier agreements between European-based suppliers and major Japanese manufacturers. Specifically, we conducted the following procedures on-site:

  • We checked whether procurement prices were calculated in accordance with the formula stated in the supplier contract.
  • We conducted interviews with personnel from relevant departments such as purchasing, technology and operations.
  • We confirmed the methods used to calculate procurement prices, and checked vouchers on a sampling basis.
  • We checked whether materials were purchased from raw material manufacturers as stated in the supplier contract.

As a result, we discovered contractual violations including errors in the calculation process resulting from the use of an exchange rate not stated in the contract, and the use of raw materials from an unapproved supplier.

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Our team

Takuei Maruyama

Partner, PricewaterhouseCoopers Aarata LLC, PwC Business Assurance LLC

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Akiko Hirao

Director, PwC Advisory LLC

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Ryusuke Nara

Director, PwC Advisory LLC

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