Microsoft Audits and License Compliance: A CIO's Playbook

$3.4M

Average Audit Finding Cost (2025)

125%

Penalty Rate for >5% Non-Compliance

30 Days

Contractual Notice Period Before Audit

5 Years

Historical Data Microsoft Can Demand

📋 Executive Summary

Microsoft software licensing audits pose significant financial and operational risks if not handled proactively. The audit landscape has intensified in 2025–2026: average audit findings have risen to $3.4 million, Microsoft now uses AI algorithms to scan customer data for compliance anomalies, and Dynamics 365 automatic license enforcement began in January 2026. Simultaneously, volume discount elimination (November 2025) and M365 price increases (July 2026) are raising the cost of remediation.

This playbook provides CIOs with a comprehensive guide to confidently navigating Microsoft's audit landscape. It covers SAM reviews vs. formal audits vs. self-verification, common compliance pitfalls in SQL Server, Windows Server, Dynamics 365 and M365, practical reconciliation methodology, discovery tools, ITAM governance, and strategies for defending against and negotiating audit outcomes.

📑 Table of Contents

Microsoft's Approach: SAM Reviews vs. Formal Audits
2026 Context: What Has Changed
SAM Review vs. Formal Audit vs. Self-Verification
On-Premises Server Compliance Risks
Microsoft 365 and Cloud Compliance Risks
Reconciling Entitlements with Usage
Preparing for a SAM Engagement or Audit
Best Practices for Ongoing License Hygiene
CIO-Level Recommendations
Frequently Asked Questions

1. Microsoft's Approach: SAM Reviews vs. Formal Audits

Microsoft's licensing compliance program operates through three primary mechanisms: voluntary SAM reviews, self-verification requests, and formal contractual audits. Understanding the differences — and the escalation path between them — is essential for any CIO managing a Microsoft estate.

In recent years, Microsoft has increasingly favoured initiating SAM engagements over immediately invoking contractual audit rights. These SAM reviews are presented as collaborative, advisory exercises — but make no mistake: a SAM review is essentially an audit by another name. The scope of data collection can be nearly as broad as a formal audit, and the third-party SAM partner reports results directly to Microsoft. All discovered shortfalls are expected to be resolved through license purchases.

Microsoft now also uses AI-driven algorithms to trigger compliance reviews. Telemetry from Microsoft 365 usage analytics, Azure Cost Management, and Azure Arc for on-premises server monitoring feeds into detection systems that scan thousands of customer licensing data points for anomalies. If your account flags an anomaly — unexpected spikes in CPU hours, mismatched entitlements, or under-licensed Copilot usage — you may receive a "friendly" SAM review that escalates if ignored.

🔍 Key Insight — SAM Reviews Are Not Optional

While SAM engagements are technically voluntary, persistent refusal increases your chances of receiving a formal audit letter. Microsoft often describes SAM reviews as a way to avoid a contractual audit — making the "voluntary" nature somewhat nominal. Independent legal experts recommend that instead of accepting Microsoft's SAM review, you engage independent advisors to conduct your own internal review first. This gives you maximum flexibility to resolve findings on your terms before Microsoft sees the data.

🛡️ Received a SAM engagement notice or audit letter? Don't respond without expert guidance.

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2. 2026 Context: What Has Changed

The Microsoft licensing landscape has undergone major structural changes in 2025–2026 that directly affect audit risk, compliance cost, and negotiation dynamics:

M365 Price Increases — July 1, 2026

Microsoft announced global price increases effective July 1, 2026, tied to new AI, security, and endpoint management capabilities being added to M365 suites. Key increases include: E3: $36→$39 (+8%), E5: $57→$60 (+5%), Business Basic: $6→$7 (+17%), Business Standard: $12.50→$14 (+12%), and Frontline F1: +33%. Business Premium remains unchanged.

For a 15,000-seat E5 organization, this represents approximately $1.6 million additional cost over a 3-year contract. These increases make license optimization and accurate assignment more important than ever — small mismatches between user needs and SKU features cost significantly more after July 2026. Organizations should audit licenses, map features to user roles, and run renewal scenarios before the increase takes effect. See our EA Optimization Service for assistance.

Volume Discount Elimination — November 2025

Since November 1, 2025, Microsoft has eliminated tiered volume-discount pricing for Online Services under EA and MPSA. All customers now pay the same list price (Level A) regardless of organization size. Large enterprises that previously negotiated Level C or D discounts (15–25% savings) face immediate cost increases at renewal.

This applies to cloud services (M365, Office 365, Dynamics 365) — not on-premises perpetual licenses. The implications for audit exposure are significant: higher per-license costs mean any compliance gap discovered during an audit is more expensive to remediate. An under-licensing finding that might have cost $500K at discounted rates could now cost $625K–$700K at Level A pricing. Factor this into your renewal negotiation strategy.

AI-Triggered Audits and Increased Enforcement

Microsoft has matured its audit process significantly. Audits are now primarily triggered by AI algorithms that scan customer licensing data for anomalies — not by account team decisions. If you receive an audit letter, it's not personal; it's algorithmic. But it will be a lengthy and costly process.

According to ITAM Research, the average financial impact of a software audit increased to $3.4 million in 2025 — up from $2.6 million in 2022. For large enterprises, findings can exceed $10 million. Microsoft's Product Terms also reinforce the right to demand historical data going back five years, significantly expanding financial exposure. Additionally, Microsoft tightened its partner-attestation API in October 2025 — one missing proof-of-license can now freeze CSP renewals and add-ons overnight.

Dynamics 365 Automatic License Enforcement — January 2026

Starting January 15, 2026, Microsoft began actively enforcing licensing within Dynamics 365 Finance & Operations. If a user does not have the correct license assigned, Microsoft disables affected functionality after 14 days. This marks a fundamental shift from soft compliance (where unlicensed usage went undetected) to automatic enforcement.

Organizations with Dynamics 365 deployments must immediately verify that every user has the correct license type assigned — including proper differentiation between full-user licenses, team-member licenses, and activity-specific licenses. The "gray zone" in D365 licensing is over. Review your Microsoft licensing position before enforcement catches unlicensed users.

Copilot Licensing Complexity

Microsoft 365 Copilot remains priced at $30 per user per month as an add-on requiring a qualifying M365 base plan. Security Copilot is being included with M365 E5 (measured in Security Compute Units). Copilot Chat is now being bundled into base M365 plans as a "freemium" entry point. These layered offerings create new compliance risk areas:

Common Copilot pitfalls: IT pilots that never received formal paid seats (under-licensed Copilot add-ons), confusion between bundled Copilot Chat features and full Copilot licenses, Security Copilot capacity left running after trial periods, and promotional pricing that expires without renewal planning. Microsoft can detect Copilot usage via telemetry — making it a likely focus of future audit scrutiny. Ensure every Copilot user has a properly assigned paid license.

3. SAM Review vs. Formal Audit vs. Self-Verification

Understanding the three distinct compliance mechanisms — and how they escalate — is critical to controlling the process rather than being controlled by it.

Aspect	SAM Review	Self-Verification	Formal Audit
Nature	Technically voluntary; Microsoft-led "collaborative" assessment	Mandatory contractual request; you verify your own compliance	Mandatory contractual process; independent auditor appointed by Microsoft
Initiated by	Microsoft's SAM team or partners — often unfamiliar contacts, not your account manager	Formal letter from Microsoft License Compliance team	Formal audit notice under EA/MBSA terms — 30 days' written notice
Conducted by	Microsoft SAM partner (certified firm); you run tools at your schedule	Your own team; you submit compliance report signed by senior executive	Big Four firm (KPMG, Deloitte, EY, PwC) acting on Microsoft's behalf
Scope	Broad — similar to audit; deployment data via MAP Toolkit, scripts, interviews	Self-defined but must cover all Microsoft products; Microsoft reviews submitted report	Comprehensive — auditors deploy scripts/agents, require proofs of purchase, VM configs, CAL counts
Tone	Collaborative/advisory — positioned as "helping you optimize"	Formal but self-controlled — no external auditors in your environment	Adversarial/formal — auditors assume non-compliance where data is incomplete
Penalties	No formal penalties; purchase shortfall licenses at your EA discount rates	No auditor fees; remediate within 30 days at current customer pricing	125% of list price if >5% non-compliant; must reimburse audit costs; MSRP for shortfalls
Can you decline?	Technically yes — but refusal may trigger formal audit	No — contractual obligation; failure to respond triggers formal audit	No — contractual obligation under EA/MBSA
Escalation path	Decline SAM → Self-Verification or Formal Audit	Incomplete/concerning results → Formal Audit	Final stage — findings enforced contractually
Best response	Accept but control the process; or politely decline and conduct independent internal review first	Conduct thorough internal review; submit accurate, well-documented report	Engage independent audit defense immediately; control data flow; negotiate findings

Expert Recommendation

For any compliance engagement — SAM review, self-verification, or formal audit — our recommended approach is: (1) Politely acknowledge receipt without immediately sharing data. (2) Engage independent licensing advisors to conduct your own internal assessment first. (3) Control the process — set the schedule, nominate a single point of contact, and funnel all information through a controlled channel. (4) Negotiate the resolution — everything is negotiable, including penalty waivers, audit cost reimbursement, and remediation timelines.

4. On-Premises Server Compliance Risks

Microsoft's on-premises server products have complex licensing rules that frequently generate audit findings. SQL Server, Windows Server, and Dynamics 365 are the highest-risk products. Understanding common pitfalls — and how auditors look for them — is the first step to prevention.

SQL Server Compliance Pitfalls

Developer Edition in production: SQL Server Developer Edition includes all Enterprise features for free — but is licensed only for development and testing. Deploying Developer Edition in production is one of the most common and costly audit findings, requiring Enterprise license purchase at full price for every production core.

Insufficient core licensing: SQL Server Standard and Enterprise are licensed per physical core (minimum 4 cores per instance). Under-counting occurs frequently after hardware upgrades, VM scaling, or hypervisor changes. In virtualized environments, all physical cores on which VMs can run must be licensed unless using proper Software Assurance virtualization benefits.

Unlicensed passive failover: A "passive" secondary replica is only free if (a) the primary has active Software Assurance, and (b) the secondary performs zero work — no reporting queries, no backups involving read operations. If the secondary is actively queried (even read-only), it requires its own license. Auditors specifically look for concurrent usage on passive nodes. With SA, you can run up to two passive secondaries per licensed primary — but both must be genuinely idle.

Edition misuse: Running Enterprise Edition with only Standard licenses, deploying more SQL VMs than Standard Edition allows (2 per license set), or using Evaluation editions beyond 180 days in production — all generate significant audit findings.

Prevention: Conduct periodic internal SQL Server audits — verify every instance's edition, core count, role (prod/dev/passive), and SA status against your entitlements. For SQL Server license optimization, engage our advisory team.

Windows Server Compliance Pitfalls

CAL shortfalls: Every user or device accessing a Windows Server requires a Client Access License — but CALs are not technically enforced by software, making them easy to overlook. New employees, contractors, BYOD devices, and remote workers all need CALs. Using the wrong CAL type (Device vs. User) for your usage pattern compounds the problem. Auditors check CAL counts against Active Directory user/device counts.

Under-licensing in virtualized environments: Windows Server Standard allows only 2 VMs per license set on a host — additional VMs require stacking licenses. Datacenter allows unlimited VMs. Migrating VMs between hosts (vMotion, Live Migration) without Software Assurance license mobility means every potential host must be licensed. A minimum of 16 cores per physical server must be licensed, regardless of actual core count.

Hybrid cloud and Azure missteps: Using the same Windows Server license for both on-premises and Azure VMs simultaneously (beyond any allowed 180-day dual-use migration period). Bringing licenses to third-party clouds (AWS, GCP) without proper License Mobility through Software Assurance. Misapplying Azure Hybrid Benefit — one Datacenter license with SA covers 16 cores in Azure, but you cannot maximize both on-premises and cloud simultaneously.

Prevention: Map every hypervisor host to its Windows Server VMs and license entitlements. Track CAL counts against AD user/device counts quarterly. Verify Azure Hybrid Benefit allocations match actual on-premises license reductions.

Dynamics 365 On-Premises/Hybrid Pitfalls

Incorrect user license tiers: Dynamics has differentiated CAL tiers (Basic, Enterprise in older versions; Full User, Team Member, Activity in current). Using a cheaper license type for users who require a higher tier creates compliance gaps. External users accessing Dynamics generally require an External Connector license unless individually licensed.

Dual-use rights exceeded: Cloud subscriptions include on-premises deployment rights — but only for the same number of licensed users. If you have 100 Dynamics 365 Online subscriptions granting on-premises rights but allow 120 users on-premises, those extra 20 are unlicensed. Software Assurance must be active to exercise dual-use rights.

January 2026 automatic enforcement: Dynamics 365 Finance & Operations now automatically validates licenses. Users without correct licenses lose functionality after 14 days. This eliminates the previous "soft compliance" approach and makes accurate license assignment critical. Every D365 environment must be audited for correct user-to-license mapping immediately.

Prevention: Maintain a user count and role mapping for every Dynamics environment. Verify dual-use rights against active SA/subscription status. With January 2026 enforcement live, any licensing gaps will be visible to Microsoft automatically.

📊 Need a comprehensive Microsoft license position assessment before your EA renewal?

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5. Microsoft 365 and Cloud Compliance Risks

As Microsoft shifts focus to cloud services and AI add-ons, new compliance risk areas are emerging that auditors are beginning to target:

🤖 Copilot Under-Licensing

IT pilots deployed without formal paid seats. Bundled Copilot Chat features confused with full Copilot licenses ($30/user/month). Security Copilot capacity running beyond trial periods. Microsoft telemetry detects all Copilot usage.

📊 Power BI Premium Overspend

Power BI Premium capacity left running after migrating to Fabric F-series. Unused Premium Per User licenses not reclaimed. Features accessed beyond licensed tier. Shared workspaces exposing content to unlicensed users.

🖥️ Azure Arc Visibility

Windows Server VMs connected to Azure Arc but missing Software Assurance coverage. Azure Arc telemetry reveals on-premises deployments to Microsoft — making compliance gaps visible even without a formal audit.

👤 M365 License Misassignment

E5 licenses assigned to users who need only E3 features (over-licensing waste). E3 users accessing E5-only security features (under-licensing risk). Shared accounts masking true user counts. Inactive licenses not reclaimed from departed employees.

⚠️ Cloud Compliance Warning

Unlike on-premises software where compliance gaps could go undetected for years, cloud services provide Microsoft with real-time usage telemetry. Microsoft 365 usage analytics, Azure Cost Management, and Azure Arc continuously report deployment and usage data. This means Microsoft increasingly knows your compliance position before any formal audit begins. The "friendly" SAM review may already be informed by data Microsoft has collected from your own environment. Proactive self-assessment is no longer optional — it's the only way to identify and remediate gaps before Microsoft contacts you. For EA optimization guidance, consult our advisory team.

6. Reconciling Entitlements with Usage

Building an Effective License Position (ELP) — a complete reconciliation of what you've deployed against what you've purchased — is the core discipline of audit readiness. This process should be repeatable and conducted at least annually.

Step 1: Inventory All Software Installations

Discover every Microsoft installation using automated tools — MAP Toolkit for on-premises, Azure Arc for hybrid, SCCM/Intune for endpoints, M365 Admin Center for cloud. Capture product name, version, edition, instance count, hardware details (CPU cores), and usage context (production vs. dev/test). Don't forget SQL Server instances on developer workstations, evaluation editions, and shadow IT deployments.

Step 2: Gather License Entitlement Records

Compile all proof of entitlement: Volume License Service Center (VLSC) reports, EA True-Up records, CSP subscription confirmations, OEM license certificates, purchase invoices. Note Software Assurance status for each product — SA confers critical rights including passive failover, license mobility, virtualization benefits, and Azure Hybrid Benefit. Request a Microsoft License Statement (MLS) periodically as evidence.

Step 3: Map Installations to Licenses

Build your ELP: for each deployment, identify the corresponding license. Allocate SQL core licenses to specific VMs, Windows Server licenses to specific hosts, CALs to specific user/device counts. Identify gaps where deployments have no matching license. Also identify surpluses — unused licenses that could be reassigned (subject to the 90-day reassignment rule). Apply downgrade rights (a 2022 license can cover 2019/2016 installations) and cross-assignment rights (Enterprise license covers Standard edition).

Step 4: Analyze Shortfalls and Plan Remediation

For each compliance gap, determine magnitude and optimal remediation: purchase licenses (at EA discount via True-Up, not MSRP), negotiate settlement (bundle remediation into renewal with better pricing), architectural changes (uninstall/consolidate to reduce license needs), or license reassignment (move unused licenses from decommissioned servers after 90-day waiting period). Remember: your EA True-Up rights may allow you to deploy first and pay at the next anniversary — argue this point during any audit settlement.

Step 5: Document Everything

Maintain detailed records of your reconciliation — inventory data, entitlement mapping, gap analysis, and remediation actions. In an audit, this documentation demonstrates good faith and can build trust with auditors. Version-control your ELP document and update it with every major change. A living ELP cuts average audit duration by approximately 50%.

7. Preparing for a SAM Engagement or Audit

Discovery and Reporting Tools

Microsoft MAP Toolkit

Free Microsoft-provided tool that scans your network for installed Microsoft products. Generates reports on Windows Servers, SQL Servers (with edition and usage info), and Office installations. Microsoft commonly requests MAP output as part of SAM self-assessments. Run it periodically and use the output as your compliance baseline. Automate daily exports into a centralized Power BI dashboard for continuous visibility.

Azure Arc and Azure Portal

Azure Arc extends Azure management to on-premises servers, providing software inventory, change tracking, and configuration visibility. Important: Azure Arc telemetry feeds data to Microsoft — be aware that connecting on-premises servers to Arc makes your deployment visible. If you use Azure VMs with Hybrid Benefit, the Azure portal tracks license allocations. Keep these records as compliance evidence.

Third-Party SAM Tools

Dedicated solutions like Flexera One, Snow License Manager, ServiceNow SAM, and Ivanti offer built-in Microsoft license reconciliation. They parse SQL Server installations, count Windows CAL usage, and import purchase records to automatically compute compliance positions. However, most tools do not handle CALs or complex use rights automatically — manual effort is still needed for edge cases. Use tools to generate your own ELP before engaging with Microsoft.

Internal Audit Checklist

✅ Audit Readiness Checklist

ELP Spreadsheet current. All deployed instances mapped to licenses, updated within last 90 days. Shortfalls and surpluses identified with remediation plans.
Deployment inventory complete. Every server with SQL/Windows/Dynamics listed — edition, version, core count, role (prod/dev/passive), and department owner.
Purchase history organized. All active licensing agreements (EA, MPSA, CSP, OEM) with terms, covered products, and current counts. Microsoft License Statement on file.
SAM process documented. Internal policy for tracking licenses, deploying new software, and roles/responsibilities. Demonstrates good faith to auditors.
Audit response team identified. SAM/ITAM manager, IT operations lead, procurement/finance contact, legal counsel. Single point of contact for Microsoft communications.
Tool outputs archived. MAP Toolkit reports, SCCM inventories, Azure portal exports, M365 Admin Center license reports — all stored in read-only SharePoint libraries.
CAL counts verified. AD user/device counts reconciled against purchased User/Device CALs. RDS licensing server checked if applicable.
Virtualization map current. Every hypervisor host documented with core count, VM count, Windows/SQL licensing allocation, and SA status.

8. Best Practices for Ongoing License Hygiene

Quarterly Internal Reconciliation

Don't wait for a true-up or audit to reconcile. Perform an internal audit quarterly — update deployment inventory, compare against entitlements, and catch growth in usage early. If a dev team stands up a new SQL Server without notification, your quarterly scan finds it immediately. Treat this like closing financial books each quarter — ITAM owns the process. Nominate a "license owner" per product family, schedule quarterly mock-audits, and log every remediation in a tracking system with deadlines and finance sign-off.

Active Directory-Based CAL Tracking

Leverage Active Directory as your CAL tracking system. If licensing per user, create a process where each new AD user triggers a CAL count check. Some organizations maintain a "Licensed Users" group in AD whose count must equal purchased User CALs. For Device CALs, track computer objects. Tie identity and access management to license assignment — when external users are given system access, verify they're licensed via External Connector or individual CALs. Monitor the RDS Licensing Server for Remote Desktop Services CAL compliance.

Organized Entitlement Documentation

Store all license documentation in a central, accessible repository — volume license agreements, Microsoft confirmations, purchase orders, indexed by contract number or product. Maintain a database of key details: product, quantity, purchase date, agreement ID, SA status, and special usage rights. For cloud subscriptions, keep admin portal screenshots showing subscription counts and assignments. Be prepared to provide proof of entitlement within 48 hours of any request. Store all proof-of-entitlement files in read-only SharePoint libraries with version history.

Change Control Integration

Incorporate license checks into IT change management. Every change request to deploy a new SQL Server, spin up a Windows VM, or add a Dynamics user should include a step: "Verify license availability with SAM team." Either allocate an existing license or trigger procurement. Without this, IT projects deploy software first and leave licensing as an afterthought — the root cause of most compliance issues. Train developers and sysadmins on basics: "Don't use Developer Edition for production" and "Cloning a VM with SQL Server needs a new license."

9. CIO-Level Recommendations

✅ Microsoft License Compliance Action Plan

Foster a compliance-oriented culture. Ensure IT teams understand that license compliance is a responsibility, not optional. Include license checks in change management. Train developers and infrastructure teams on common pitfalls. Make compliance part of IT culture through policies, training, and leadership messaging.
Invest in SAM capabilities. Treat Software Asset Management as a strategic asset. Invest in SAM tools, hire or develop in-house licensing expertise, and engage external experts periodically. A mature SAM capability pays for itself through optimization savings and avoided audit costs. Consider establishing a "License Center of Excellence" covering all vendors.
Conduct a full ELP before your next EA renewal. Map every Microsoft deployment against entitlements. Identify and remediate compliance gaps before Microsoft sees them. Use the ELP as your negotiation baseline — knowing your exact position prevents surprise findings. Engage EA optimization advisory for complex estates.
Prepare for July 2026 M365 price increases. Audit current license assignments. Segment users by role (executives, knowledge workers, frontline, contractors) and match to appropriate SKU tiers. Eliminate over-licensing (E5 users who need only E3). Identify tool overlap (third-party security when M365 includes equivalent). Run renewal scenarios at new pricing before negotiating.
Monitor Dynamics 365 automatic enforcement. Since January 2026, incorrect D365 licenses trigger functionality lockouts after 14 days. Verify every D365 user has the correct license type immediately. Implement ongoing monitoring of user-to-license mapping.
Stay proactive with Microsoft. Engage your account team on licensing questions. Request a Microsoft License Statement periodically. Before renewals, ask for Microsoft's view of your licensing — compare it to your records and reconcile differences. Being proactive can preempt audits.
Leverage audits as negotiation opportunities. If selected for a SAM or audit, reframe it as leverage for better terms: "We'll purchase missing licenses, but we want better pricing on our renewal/upgrade." Microsoft often resolves compliance issues through new agreement commitments. Never accept the first audit report value — there is always room to negotiate. Engage independent audit defense for formal audits.
Budget for compliance. Set aside a reserve for true-ups and potential compliance costs each year. At current audit finding averages ($3.4M), even modest exposure justifies proactive investment. Work with Finance to create a software compliance reserve — unused funds can be repurposed; unplanned audit penalties cannot.
Engage legal counsel for formal audits. If financial exposure is significant, involve lawyers experienced in software licensing early. They can interpret contract language, assert true-up rights, push back on unreasonable assumptions, and ensure the 5% threshold and 125% penalty clause are properly applied.
Integrate license management with digital transformation. When adopting cloud, DevOps, or AI initiatives, include license compliance in planning. Moving to Azure? Plan Azure Hybrid Benefit allocations. Containerizing SQL? Understand per-container licensing. Deploying Copilot? Ensure proper license assignment from day one. Align license strategy with IT strategy.

🛡️

License Optimization

Frequently Asked Questions

What's the difference between a SAM review and a formal audit?+

A SAM review is presented as a "voluntary" collaborative assessment where you run Microsoft's tools at your own schedule and any shortfalls are remediated at your normal EA discount rates without penalties. A formal audit is a mandatory contractual process conducted by Big Four auditors on Microsoft's behalf — with 30 days' notice, comprehensive evidence requirements, and potential penalties of 125% of list price for non-compliance exceeding 5%. The critical difference is in how findings are resolved: SAM reviews are more lenient; formal audits carry contractual enforcement teeth. However, the scope of data collection is nearly identical. A Self-Verification sits between these — it's mandatory (you cannot decline) but you control the process and submit your own compliance report.

Should I accept or decline a Microsoft SAM review?+

Many independent licensing experts recommend politely declining the initial SAM review and instead conducting your own internal assessment with a third-party licensing consultant. This gives you maximum flexibility to identify and resolve compliance gaps on your terms — at your discount rates and on your timeline — before Microsoft sees the data. Once your internal review is complete, you'll be in an excellent position to respond to any subsequent formal audit demands. If you choose to participate, control the process: set the schedule, nominate a single point of contact, and have your audit defense advisor review all data before submission.

What triggers Microsoft to audit a company?+

In 2025–2026, Microsoft primarily uses AI algorithms scanning customer licensing data for anomalies — unexpected spikes in usage, mismatched entitlements, Azure Arc telemetry revealing unlicensed servers, and M365 usage patterns suggesting under-licensing. The process is no longer driven by account teams but by automated detection systems. Other triggers include: EA renewals (Microsoft often reviews compliance before negotiating new terms), mergers and acquisitions (combining license estates creates gaps), declining Microsoft spend (signaling potential unlicensed alternative usage), and refusing a SAM engagement request.

How far back can Microsoft audit my usage?+

Microsoft's Product Terms reinforce the right to demand historical data going back five years. This significantly expands financial exposure — if you've been under-licensed on SQL Server cores for three years, Microsoft can claim remediation covering the entire period. This is why proactive compliance management is critical: discovering and fixing a gap today is far cheaper than having Microsoft discover it and demand five years of back-licensing at 125% of list price. Maintain historical documentation of your licensing position so you can demonstrate when gaps were identified and remediated.

Can I negotiate the outcome of a Microsoft audit?+

Yes — everything is negotiable. Microsoft's goal is typically to sell licenses or subscriptions, not to litigate. Common negotiation tactics include: rolling compliance purchases into a new EA at discounted rates rather than paying MSRP, requesting penalty waivers (the 125% surcharge) in exchange for a new multi-year commitment, asserting EA True-Up rights to argue that deployment was within "deploy now, pay at anniversary" terms, proposing cloud migration instead of on-premises remediation, and negotiating audit cost reimbursement waivers. Never accept the first audit report at face value — engage independent licensing advisors who understand the contractual leverage points.

How do the July 2026 M365 price increases affect audit risk?+

The price increases (E3 +8%, E5 +5%, Business tiers +12-17%, Frontline F1 +33%) make every compliance gap more expensive to remediate. Combined with the November 2025 elimination of volume discounts, under-licensing findings now cost more at Level A pricing than they would have at historical discount levels. Organizations should conduct a thorough EA optimization review before July 2026 to right-size licenses, eliminate over-licensing waste, and lock in current pricing where possible through early renewal or extended contract terms.

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Fredrik Filipsson

Co-Founder, Redress Compliance

Fredrik Filipsson brings over 20 years of experience in enterprise software licensing, including direct roles at IBM, SAP, and Oracle. As co-founder of Redress Compliance, he has helped hundreds of Fortune 500 organizations navigate Microsoft, Oracle, SAP, IBM, and Broadcom licensing — optimizing costs, defending against audits, and securing favorable contract terms through independent, vendor-neutral advisory.