Third Party Risks And Internal Auditors

by Michael Volkov
Contact

ccoandia2You remember the corny song – “People who need people are the luckiest people in the world.”

For a Chief Compliance Officer that saying is particularly important when it comes to third party risks.  CCOs need their internal auditors.  This relationship is even more important when it comes to third party risks.

Internal auditors are important to third party risks at two important stages of due diligence review and monitoring system.

First, during the due diligence process, the internal auditors are invaluable in assisting in designing financial controls which will govern the company’s payments to the third party.  Depending on the information gathered during the due diligence process and the contract negotiations with the third party, the company has to impose certain requirements which have to be met before the third party gets paid.  These requirements should be specifically included in the contract.

These include:

Detailed description of services provided in each invoice.  This is a critical requirement for a company to secure, preferably in the written contract.  The third party has to provide a detailed statement of services provided to the company in its invoice.  The internal auditor needs to review the statement to make sure it is in sufficient detail and flag any potential issues.  It has to be made clear that, if the third party fails to provide the necessary details, the third party will not be paid.

Specific payment arrangements for the third party to receive company payments.  The third party needs to assure the company that it will receive payments at a local bank, or if justified, at an offshore location which does not raise red flags of an intent to avoid taxes or disguise the payments from regulators or law enforcement.ccoia2

Rights of the internal auditor or a designated representative to conduct an audit of the third party’s books.  Most CCOs are familiar with this requirement, and third parties are getting used to seeing this requirement in written contracts.  As more companies impose this requirement, third parties are more agreeable to the provision.  Some, however, are resisting the audit rights by trying to restrict the right to transactions between the parties.  That is not acceptable.

After the due diligence process has been completed, and a written contract has been executed, internal auditors play a key role in monitoring the relationship with the third party.  As always, the auditors are on the front lines of the relationship and are critical to flagging potential issues.

Internal auditors need to carefully review invoices and coordinate any issues with the CCO.  Before making a payment on an invoice, the auditors need to coordinate the financial controller to ensure that they have a chance to review the invoice.  If there are red flags which come up, they need to alert the CCO.

ccoia3While auditors rarely have the time nor resources to conduct audits of third parties, they need to add a few third parties to a risk-ranking audit schedule.  It is always hard to prioritize a third party audit but it is critical to try to conduct a few audits for high-risk third parties.

On occasion, when both a CCO and an auditor identify a third party for potential scrutiny during the term of a contract, it may be appropriate to refresh the due diligence and re-evaluate the third party.  If the company identifies serious problems, the company should consider exercising its termination rights.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

Written by:

Michael Volkov
Contact
more
less

The Volkov Law Group on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.