Vendor Audits: A Strategic Tool for Cost Optimization, Eliminating Hidden Costs, and Strengthening Compliance

NEXORA LAWFIRM has conducted dozens of internal fraud and compliance investigations across Vietnam — including in Hanoi, Hai Phong, Hung Yen, Hai Duong, Ho Chi Minh City, Binh Duong, and Dong Nai. Among these, the receipt of kickbacks (rebates) from suppliers is an extremely common issue among Japanese companies. Due to a shortage of Japanese expatriate staff and limited familiarity with the local market, much of the procurement function is often left in the hands of local staff. As a result, governance risks such as opaque pricing and collusion with suppliers frequently come to the surface. Against this backdrop, a Vendor Audit can serve, from both a legal and a practical standpoint, as a strategic means of reducing hidden costs, increasing price transparency, and improving the health of the procurement process. This article explains the concept of a Vendor Audit, its scope, its strategic benefits, and the concrete steps involved.

01 - The Reality of "Hidden Costs" (Kickbacks) Lurking in the Supply Chain

Many Japanese companies operating in Vietnam lack sufficient familiarity with the local market, business customs, and negotiation practices with suppliers. As a result, they have little choice but to rely heavily on local staff or intermediaries for purchasing and procurement — making it difficult to achieve transparent procurement management that puts the company's interests first.

● A Deep-Rooted "Kickback" Culture and the Resulting Increase in Hidden Costs

Within Vietnamese business customs, a kickback (rebate) culture is a pervasive, deeply entrenched problem. Many Japanese companies bear this "invisible cost" on a daily basis, and it gradually erodes their competitiveness.

Furthermore, when an employee receives kickbacks from a supplier, it creates a relationship of shared interest between the internal staff member and the supplier, giving rise to risks such as:

Concealment of wrongdoing
Setting terms favorable to the supplier
Locking in a trading environment that disadvantages the company

● The Risk of Collusion with Suppliers

In some cases, a purchasing officer or their relatives hold an investment or other relationship with a supplier, and there have been reported instances of breaches of contract or wrongdoing being deliberately overlooked as a result.
Such collusion ultimately increases a company's financial losses and legal risk.

● Concrete Examples of "Hidden Costs"

The following are typical examples actually seen in the procurement operations of Japanese companies:

A purchasing officer demands or accepts a kickback under an "unwritten understanding" and selects a particular supplier accordingly (for example, by persuading colleagues internally or falsifying quotations, giving preference to vendors willing to pay kickbacks)
The supplier passes the cost of the kickback on through a price markup or by lowering quality
The purchasing officer colludes with the supplier to fabricate quotations, contracts, and supporting documents in order to evade checks by headquarters or senior management
(There have been frequent cases of "comparison quotations" being fabricated using the names and seals of real companies obtained from the internet)

● Management and Legal Impact

Such "hidden costs" may not be immediately apparent, but they lead to a continuous, structural increase in costs and ultimately to serious management risks, including:

Rising procurement costs
Persistently high product costs → loss of competitiveness
Increased risk of violating anti-bribery and anti-corruption regulations (a particular concern for FDI companies that place a strong emphasis on global compliance)

which can result in serious management risk.

02 - Are a Company's Internal Controls Really Sufficient?

To address the opaque costs and fraud risk described above in the procurement function, many Japanese companies have implemented internal controls such as:

Tightening the approval process
Introducing a competitive bidding system
Making it mandatory to obtain quotations from multiple suppliers

While these measures may appear effective at first glance, in practice they often amount to nothing more than "formal controls" and fail to address the root cause of the fraud.

● The Limits of Superficial Controls ●

In practice, formal controls are often easily circumvented through tactics such as:

Suppliers colluding among themselves to pre-arrange prices and quotation details, staging a "competition" in name only
Bid specifications being designed from the outset so that a particular vendor wins
A lack of independent verification within the internal procurement and approval process, making it easy to overlook fraud
The final approver (often a Japanese expatriate executive) being unable, due to time and practical constraints, to substantively check quotations and contract terms

Where controls exist in form only, it is extremely difficult to detect fraud when insiders are themselves complicit.

● The Importance of Substantive Monitoring and Verification ●

For internal controls to function effectively, more than a formal approval process is needed — a mechanism capable of substantively detecting fraud is required, including:

An independent, third-party review of procurement
Regular procurement audits and data analysis
Establishing internal and external whistleblowing channels
among other measures.

03 - Can a Vendor Audit Be a Strategic Solution?

3.1. The Concept of a Vendor Audit

A Vendor Audit (supplier or procurement audit) is an activity in which an independent party examines and evaluates a company's existing suppliers and its entire procurement, purchasing, and payment process.
Its main objectives are as follows.

Verifying the transparency and rationality of quotations, purchase orders, and contracts
Assessing the risk of conflicts of interest and kickbacks
Identifying anomalies or signs of fraud in pricing, quality, delivery, and supporting documentation
Proposing improvements to the procurement process and internal control system

● The Difference Between a Vendor Audit and an Internal Audit ●

Item

Vendor Audit

Internal Audit / Internal Controls

Scope

The company's external suppliers

The company's internal operations and procedures

Purpose

Verifying alignment with market pricing, competitiveness, and supplier soundness

Confirming that internal procedures and systems are being properly operated

A Vendor Audit differs from an internal check in that it provides an independent verification of the market and external suppliers.

3.2. Scope of a Vendor Audit

The scope of a Vendor Audit can be tailored flexibly to a company's circumstances, but generally includes:

Price comparison against market benchmarks
Verification of price reasonableness by obtaining quotations under a third-party name
Interviews with suppliers to confirm trading customs and the presence or absence of kickbacks
Review of bidding and supplier-selection documentation
Cross-checking of contracts, purchasing data, and payment data
Random interviews with employees and suppliers
Confirmation of compliance with internal rules and applicable law

3.3. Strategic Benefits of a Vendor Audit

A Vendor Audit is not merely a cost-cutting tool — it is a strategic measure that fundamentally strengthens a company's transparency and governance.

✅ Substantive cost optimization

By correcting unreasonable costs that diverge from market pricing, a company can significantly reduce procurement costs through supplier review and renegotiation of contract terms.

✅ Eliminating "hidden costs" (kickbacks)

Conducting an independent audit by a third party sends a strong signal of the company's commitment to compliance, both internally and externally, and can be expected to deter fraud.

✅ Strengthening internal controls and risk management

A Vendor Audit can function as a complementary internal-control tool that helps address international anti-bribery regulations such as the FCPA and the UK Bribery Act.

✅ Improved accountability and credibility with headquarters and shareholders

An independent audit report provides headquarters with objective evidence of management transparency and control, strengthening governance.

3.4. Steps for Conducting a Vendor Audit
Step 1: Selecting the audit scope and preparation

Since auditing every supplier is not realistic,
　priority should be given based on (1) high risk, (2) high transaction value, and (3) high transaction frequency
to narrow down the scope.
Internal transaction data should be gathered and organized in advance.

Step 2: Review and strategy design by specialists

· Lawyers and procurement audit specialists design the audit strategy based on a checklist.

Step 3: Investigation of suppliers

Obtaining comparison quotations, conducting site visits, verifying pricing, and interviewing relevant departments and suppliers as needed.

·

Step 4: Reporting and recommendations

Based on the findings of the investigation, a report is prepared identifying signs of fraud and proposing improvements.

04 - FAQ on Vendor Audits

Q1. How often should a Vendor Audit be conducted?

This depends on the company's size, number of suppliers, and risk level, but many companies are advised to conduct one at least once a year. Regular audits help maintain transparency and competitiveness in procurement activities.

Q2. What should be kept in mind when conducting one?

Because a Vendor Audit also serves to uncover fraudulent conduct, strict information control and confidentiality are essential.
An effective audit requires avoiding leaks of information to those involved beforehand and carefully choosing the timing of the investigation.