Internal Audit Best Practices to Stay Ahead of Microsoft Audits
Introduction: The best defense against a Microsoft audit is a good offense – in other words, conducting internal license audits and ongoing compliance practices so you never get caught off guard.
For CIOs, IT Asset Managers, and procurement leaders, establishing strong internal audit routines can identify and fix licensing issues long before Microsoft’s official auditors knock.
This article outlines best practices for running internal software license audits, discusses how to build a culture of continuous compliance, and provides tips to ensure your organization is always “audit-ready.”
Proactive internal audits reduce the risk of penalties and often result in cost savings by optimizing licenses.
Let’s explore how to stay ahead of Microsoft audits through disciplined internal practices.
Why Conduct Internal License Audits?
Internal audits are essentially a rehearsal for the real thing.
By regularly reviewing your Microsoft licensing compliance in-house, you achieve several benefits:
- Early Detection of Issues: An internal audit will identify if there’s a licensing shortfall or a misconfiguration (such as a mislicensed SQL Server instance or users accessing software without proper licenses). It’s far better to discover and address such issues than it is for Microsoft’s auditors. Early detection means you can fix the problem on your terms – often by reallocating licenses or making a planned purchase – instead of facing urgent true-ups and penalties.
- Avoiding Audit Red Flags: Microsoft often selects audit targets based on specific signals – for example, a history of non-compliance or an organization that hasn’t performed a true-up in a long time. Organizations that perform routine internal audits tend to also do regular true-ups and cleanup, which can make them less likely to exhibit glaring compliance gaps. While not foolproof, staying compliant can lower your profile as a risky customer.
- Financial Planning and Cost Optimization: Internal audits don’t just prevent penalties; they also highlight inefficiencies, such as over-licensing or unused licenses. You can reclaim costs by identifying licenses that are paid for but not being used (common in enterprise agreements or subscriptions). For instance, an internal audit might reveal 50 unused Office 365 E5 subscriptions that can be reassigned or downsized at renewal, resulting in cost savings. In this way, internal audits serve as dual purposes, acting as both license optimization exercises and internal audits.
- Readiness for Official Audits: If and when Microsoft does initiate an audit, an organization that has done its homework will be able to respond much more smoothly. You’ll have documentation ready, know where your potential weak spots are (hopefully addressed them), and be in a stronger negotiating position. Audit readiness is a deterrent – auditors often find that well-prepared companies handle the process quickly and come out with minimal findings, because there are no surprises.
- Compliance Culture and Accountability: Conducting regular internal checks sends a clear message throughout the organization that software compliance is a priority. It encourages teams to follow processes (such as not installing software without approval) because they know compliance is actively verified. This fosters a culture of accountability and reduces the chances of intentional or negligent license misuse by employees or IT staff.
Internal audits are like a preventive health check for your IT environment’s licensing. Just as you wouldn’t wait for a major illness to get a health checkup, you shouldn’t wait for Microsoft to tell you something’s wrong with your licensing.
By then, it’s too late and likely expensive. Proactive monitoring keeps your organization healthy and free of audit “surprises.”
Setting Up an Internal Audit Program
Establishing an internal audit program for software licenses involves planning, assigning responsibilities, and having a repeatable process.
Here’s how to set up a robust program:
- Define Scope and Frequency: Determine which software/vendors to audit and how often. Given Microsoft’s ubiquity and complexity, a best practice is to audit Microsoft licensing at least annually, if not quarterly. Some organizations choose a continuous rolling audit (focusing on different product sets in different quarters). Define the scope: all Microsoft products or the most critical ones (e.g., Windows, Office 365, Azure usage, Windows Server, SQL Server, Dynamics, etc.). Eventually, all should be covered.
- Assign an Owner and Team: Designate a Software Asset Manager or IT Asset Management (ITAM) team to lead the internal audit effort. This team needs cross-functional support. Key members often include: someone from IT operations (who can run discovery tools or pull data), someone from procurement or contracts (to provide license entitlement info), and someone from compliance or internal audit (to provide oversight and ensure process rigor). If the company has a governance or risk committee, include software compliance in its charter.
- Develop Audit Procedures: Create a standardized procedure or checklist for conducting the audit. This may include gathering inventory data (using SAM tools or scripts), collecting entitlement data (such as purchase records and Microsoft License Statements), reconciling data, identifying gaps or surpluses, reviewing findings with application owners, and documenting the results. Having a written procedure ensures consistency each time you perform the audit.
- Utilize Tools and Templates: Leverage tools to automate data collection (as discussed in the prior article on SAM tools). Also, prepare templates for recording findings – for example, maintain an Effective License Position (ELP) spreadsheet. This spreadsheet would list each Microsoft product, the number of deployments, the number of licenses you own, and the delta (shortfall or excess). Templates for inventory collection (server lists, user lists) and reporting results (maybe an internal audit report format) will save time in each cycle.
- Management Buy-In: Secure support from senior management for the internal audit program. Explain that a small ongoing effort can prevent a very costly incident later. Management backing is important if you need to enforce corrective actions (like purchasing additional licenses or reallocating budgets). Additionally, leadership can set the tone for teams to cooperate with the internal audit; for instance, all departments must provide data or access when the ITAM team requests it.
- Train the Team: Ensure the people conducting the internal audits understand Microsoft licensing rules. Invest in training or certifications for software asset management. It may also be helpful to have a relationship with an external licensing expert who can advise the internal team, especially during the first few audits. This knowledge is critical for accurately identifying what constitutes a compliance gap and what doesn’t.
You turn ad-hoc license checks into a mature internal audit program by formalizing these elements.
It should operate with the same seriousness as a financial audit, with scheduled activities, clear responsibilities, and reports to executives or the board (since software compliance can be considered part of risk management).
Read SAM Tools for Microsoft Audit Preparedness.
Key Steps in an Internal Microsoft License Audit
Let’s break down the process of performing an internal audit step by step. This can serve as a checklist for your team:
1. Inventory All Deployments:
Compile a comprehensive list of all Microsoft software. This includes server software (Windows Server OS, SQL Server, Exchange, SharePoint, etc.), client software (Windows OS, Office suites, Visio, Project), cloud services (Microsoft 365, Azure workloads), and developer tools (Visual Studio, etc.), if applicable. Utilize multiple methods, including SAM tools, network scans, Active Directory (for users/devices), cloud admin portals, and interviews with application owners. Remember to include not only production, but also test and development environments – auditors will verify those as well. Document the inventory, e.g., “SQL Server 2019 Enterprise – 10 instances across five servers; Office 365 E3 – 1200 user accounts assigned; Windows Server 2022 Datacenter – 50 VMs on X cluster,” and so on.
2. Gather License Entitlements:
Gather all records of licenses and subscriptions you have. This might involve extracting a Microsoft License Statement (MLS) if available (Microsoft can provide a report of all licenses you’ve purchased through volume licensing). Collect Enterprise Agreement entitlements (e.g., how many of each product are you entitled to under the EA and for what period), any standalone purchases (OEM or retail licenses for Windows/Office on PCs, if any), and cloud subscriptions (from the Microsoft 365/Azure portal billing). Don’t forget special licensing programs: maybe you have a CSP (Cloud Solution Provider) subscription or certain MSDN (Visual Studio) subscriptions that allow specific usage. Compile this into a master list of entitlements.
3. Reconcile Deployments vs. Licenses (Effective License Position):
Using the inventory and entitlement data, create an Effective License Position. This is typically a table or spreadsheet where you list “Deployed quantity” vs “Licensed quantity” and note any surplus or deficit for each product. For example: Windows Server Standard – 20 instances running, 16 licenses owned = Shortfall of 4 licenses. This step can be time-consuming if done manually, which is why tools are helpful, but you still need to validate the reconciliation even with tools. Attention to version and edition: Microsoft often allows some version downgrade rights if you are running Windows Server 2022. Still, only licenses for 2019, so check if downgrade rights cover you (they usually do if you own a newer license version). Conversely, edition matters (e.g., Standard vs. Datacenter, E3 vs. E5, etc.). Also, consider license use rights: for example, if you have Software Assurance on Windows Server, you may be using the Hybrid Use Benefit in Azure – account for these properly (i.e., Azure VMs covered by on-premises licenses).
4. Identify Compliance Gaps and Surplus:
Once reconciled, highlight any non-compliance areas (where usage exceeds licenses). Also, mark any surplus or unused licenses (where the number of licenses purchased exceeds the current use). For each gap, quantify the potential exposure in dollar terms – e.g., “Short 4 Windows Server Std licenses, potential cost $X each = $Y exposure.” This helps prioritize which gaps are high-risk/high-cost. Sometimes, a gap in a data center product, such as SQL Server Enterprise, can represent a significant cost exposure (tens of thousands of dollars). In contrast, a gap of a few Office licenses is minor. Knowing this helps focus management’s attention appropriately.
5. Investigate and Resolve Findings:
Before rushing to purchase to cover shortfalls, investigate the causes and see if there are remediation options. For instance, if you found 100 extra Microsoft 365 E3 licenses in use than you thought, is it because some old accounts were never deactivated? If so, disabling or reallocating those accounts can resolve the issue without incurring new expenses. Or if a SQL Server is unlicensed, determine why – did someone deploy a new instance outside the normal process? Could we retire or consolidate it instead of licensing it? Typical remediation actions include: uninstalling or decommissioning unused software, reallocating existing licenses (perhaps you have spare licenses from a different project that can be assigned), purchasing additional licenses (if the gap is legitimate and needs to be covered), or adjusting configurations (such as moving a workload to a licensed server). Additionally, address process gaps that allowed non-compliance: e.g., enforce that new server builds require a license check approval.
6. Document the Audit Results:
Produce a report or maintain documentation of what was found and what was done. This report might include an executive summary (e.g., “We found we are largely compliant except for X and Y products, which had deficits. Actions are underway to address these. Estimated cost to remediate: $Z or we have reallocated existing licenses to cover.”). Also include details in appendices (inventory lists, license lists, the ELP spreadsheet). This internal audit report can be shared with relevant stakeholders (CIO, CFO if financial impact, IT directors) so everyone knows the license compliance status.
7. Track Action Items to Completion:
Ensure any remediation tasks identified are followed through. If procurement needs to purchase 50 additional Office 365 licenses, ensure this happens and update your records accordingly. If IT needs to uninstall a specific unauthorized instance, verify and document that it has been done. Close the loop on the findings so that by the time of the next internal audit, those particular issues are resolved and won’t resurface.
8. Repeat on a Regular Schedule:
Set the next internal audit date in advance to ensure timely preparation. Many organizations conduct an internal audit before a Microsoft true-up or annual renewal cycle, so the findings can inform true-up orders or negotiation strategies. The key is consistency – a one-time internal audit helps, but the environment changes constantly (with new software deployments, new hires using Office 365, etc.), so continuous vigilance is necessary.
Maintaining Continuous License Compliance (Beyond Periodic Audits)
While periodic internal audits provide valuable snapshots, leading organizations integrate continuous compliance monitoring into their operations.
Here are ongoing best practices to stay ahead all the time:
- Integrate SAM into IT Change Management: Whenever there’s a change—a new server, software installation, or project—include a step to evaluate licensing. For example, if a project wants to deploy a new SQL Server, the change management process should require a check: Do we have a spare license, or do we need to buy one? This ensures that compliance is maintained throughout the transaction, not just at audit time.
- Real-Time Tracking with Dashboards: If you have SAM tools, set up dashboards that are reviewed every month. For instance, an IT asset manager might meet monthly with application owners to demonstrate their license usage versus entitlements. If one department suddenly increases its use of Visio or Power BI, catch it then, rather than a year later.
- Keep Documentation Readily Accessible: Auditors (internal or external) love documentation. Maintain a repository of important documents like licensing agreements and contracts, purchase records, Microsoft’s Product Terms (for reference of rights), internal policies (software usage policy, SAM policy), and past audit reports. If a surprise check (even internal) happens, you’re not scrambling to find paperwork.
- Educate and Communicate: Regularly educate IT teams and end-users on license compliance best practices and guidelines. For example, remind developers that using a Visual Studio Developer license in production is not permitted, or remind employees that installing Microsoft Project on their machines without a license assignment constitutes a policy violation. Many organizations send periodic “SAM tips” or have an internal website with guidelines for software usage. An informed user base can prevent compliance issues from starting.
- Monitoring High-Risk Areas: Some Microsoft products have historically caused compliance issues – notably SQL Server (with its core licensing and virtualization), Windows Server (especially when used in hybrid cloud or clustering environments), and Microsoft 365 account creep (where users remain active after leaving the company). Pay extra attention to these. For instance, implement a process with HR so that when employees leave, their Office 365 license is removed promptly (preventing accumulation of unassigned but active licenses). Or regularly audit administrator accounts that might be using privileged access – ensure they’re licensed appropriately if they double as users.
- Simulate an Auditor’s Approach: Occasionally, approach your environment as if you were an external auditor. That might mean running the same discovery scripts Microsoft’s auditors use (if available), checking things an auditor would – e.g., verifying that every SQL Server’s edition matches what’s recorded, or checking if any unauthorized administrator accounts exist on O365. This perspective can highlight things that internal teams might overlook due to familiarity.
The idea is to shift from a reactive posture (finding and fixing after the fact) to a proactive, always-on posture. When continuous compliance is part of IT operations, a formal audit (internal or external) becomes much less daunting because you’re essentially always audit-ready.
Best Practices Summary Checklist
To encapsulate the internal audit best practices, here’s a quick checklist you can use as a reference:
- ✓ Schedule regular internal Microsoft license audits (e.g., quarterly or semi-annually). Put dates on the calendar.
- ✓ Maintain an up-to-date inventory of Microsoft software deployments (update this continuously via tools or IT processes).
- ✓ Maintain an updated license entitlement repository (all contracts, purchases, and current license counts).
- ✓ Use an Effective License Position (ELP) spreadsheet or tool to reconcile deployments vs entitlements.
- ✓ Create internal audit templates and documentation (inventory lists, ELP report, compliance scorecard) for consistency.
- ✓ Form an internal audit response team with clear roles (ITAM lead, IT ops data gatherer, procurement for license proofs, etc.).
- ✓ Document policies and procedures for software request, approval, deployment, and retirement, to enforce compliance lifecycle.
- ✓ Review and act on internal audit findings promptly – implement remediation and log what was done.
- ✓ Engage independent advisors for periodic reviews – for example, have an external expert do a quick audit or review your internal audit results once a year for a second opinion.
- ✓ Keep leadership informed – provide high-level compliance status reports to CIO/CFO so they understand our risk exposure or need for budget to true-up.
By following this checklist, your organization can systematically avoid potential audits.
The Role of Independent Advisory Support
Even with a strong internal program, don’t hesitate to leverage independent licensing experts.
Firms like Redress Compliance (and others specializing in Microsoft licensing) can amplify your internal efforts:
- They can provide templates and best practices refined from other organizations. For instance, they might give you an ELP template that captures nuances your team didn’t consider.
- They can benchmark your compliance process against that of industry peers—for example, whether you audit frequently enough and use the right tools.
- For especially tricky licensing areas (say you’re rolling out a new Dynamics 365 module or implementing a dev/test Azure environment), an external expert can advise you on how to license it correctly upfront, saving you headaches later.
- If your internal audit identifies a substantial compliance gap with significant financial implications, an independent advisor can help strategize a cost-effective solution (for example, exploring alternative licensing schemes or phasing purchases).
- Finally, if an official Microsoft audit does occur, having had independent insight means you can engage them to interface with Microsoft or validate the auditor’s findings. It’s much like having an accountant double-check your financials before an IRS audit – you become more confident.
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