General Counsels: How do auditors approach investigations?

As general counsel, understanding the role and impact of auditors in organisational investigations is crucial. Auditors are key stakeholders, and their early involvement can minimise business impact and lead to a more efficient investigation. Early communication about fraud and misconduct investigations is advisable to prevent any potential delays in signing financial statements.

An auditor is generally concerned with ensuring that the specific incident has been dealt with appropriately and assessing if there could have been other similar instances. Key questions include:

1. [ONE] Who is involved? There is a significant difference between wrongdoing committed by someone at board level versus someone within the organisation who has no direct reports and is not involved in financial reporting.
2. [TWO] Is it internal or external fraud? Internal fraud presents notable challenges due to bad actors within the organisation.
3. [THREE] What is the nature of the wrongdoing – is it asset misappropriation or financial statement misrepresentation? With financial statement misrepresentation, no money may have left the business, but the motivation to misrepresent accounts, could be a pervasive issue affecting the organisation widely.
4. [FOUR] How much is at stake? Although the audit team will take the size of the fraud into account – it is not merely a question of materiality. As per the auditing standards, fraud is unlikely to be an isolated occurrence and any such instance must be considered for wider implications.
5. And lastly, who identified the fraud? Was it management or the auditor. If the controls of a business have identified the fraud then that is better than them failing to do so.

Have the auditors front of mind, when conducting an investigation. If it is to be performed internally, ensure it is sufficiently documented including detailed working papers, so that these can be shared with the auditor as audit evidence.

If appointing third-party investigators, it is important to consider the team’s capability, competence and objectivity.

Discuss the investigation scope with your auditors, and allow them to provide feedback. The investigation scope must adequately address the allegations as well as the resultant audit risks. If a misstatement is identified that could be due to fraud, auditors must reassess the risk of fraud and consider possible collusion among employees, management, and third parties.

Shortcomings in the original scope can lead to delays in signing the audit or a qualified audit opinion. Naturally this can have significant wider repercussions.

Audit teams cannot simply rely on the outcome of a third-party or management-led investigation without undertaking their own procedures. This is similar to an audit team using its own valuation expert to verify a third party valuation. The extent of work varies – typically the audit team will bring in their own forensic experts to conduct some discrete tests on the investigative work.  

The identification of potential fraud or similar issues in your organization could have a significant impact on the extent of your auditors’ work. By understanding their requirements in respect of investigations, keeping them informed and involving them early and throughout the process, general counsels can ensure a smoother investigation and more timely completion of external audits.