Internal Audits: The Questions Audit Committees Should Ask

Audit committees are responsible for ensuring that a company’s financial reporting function is operating as intended, following the correct policies and procedures and providing an accurate financial accounting of the company’s operations.

When contemplating an internal audit, here are some questions the audit committee should consider:

Is an investigation necessary? Not every complaint or problem deserves a detailed investigation. Those that may be deserving of an investigation include allegations where management is involved, the alleged incident is part of a pattern of misconduct, or when there is a significant amount of money involved.

Who is the best choice to conduct the investigation? Attorneys are the logical choice since they know the law and the results are protected by attorney-client privilege. However, an in-house attorney may not be the best choice if impartiality and objectivity are the goals, especially if management is involved.

What will be the scope of the investigation? The scope should be broad enough to determine why the problem occurred, who was responsible, the potential impact on financial statements, if any laws were broken and how the risk of recurrence can be minimized.

What steps have been taken to preserve evidence? If the problem looks like it will lead to a government charge or litigation, it is important to ensure relevant information is preserved.

When do we notify the independent auditor? In many instances, the independent auditor may have the final word on whether an investigation has been conducted thoroughly, so it is best to involve them early on in the process.

Are privileged materials and work product being protected? If structured properly, an investigation by counsel should be protected by privilege and work product. In some circumstances, disclosure to outside parties — including the auditor or regulators — may constitute a waiver of privilege, so be sure that any disclosures are made with this in mind.

What corrective actions are needed? The goal of an audit committee investigation should be to arrive at appropriate remedial measures that will ensure the infractions are not repeated.

Should we self-report? There are circumstances when self-reporting is mandated by law. In addition, regulators tend to view companies that self-report more favorably when it comes time to assess penalties. However, there are also times when self-reporting can lead to more government involvement, so tread carefully and with the advice of counsel.

The Cogdell Law Firm is a boutique law firm focusing on large, complex business and criminal financial-related litigation, including white collar criminal defense, securities fraud, health care fraud investigation, criminal appeals and state criminal defense. When results matter most, contact Dan Cogdell at (713) 426-2244 or info@cogdell-law.com.

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