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September 30, 2020
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Internal auditors make excellent expert witnesses because of their skills, certifcations, and professional experiences.
When faced with the critically important task of choosing the right expert, counsel must start with credentials but also evaluate competence, credibility, and the ability to communicate.
One profession is a consistently reliable source of experts with these skills and more: internal auditing.
The Role of the Internal Auditor
Internal auditors provide organizations with objective assurance and consulting services focused on mitigating risks and creating enterprise value. They are trained skeptics with a deep understanding of business processes, risks, corporate governance, regulations, internal controls and fraud schemes.
Internal auditors perform detailed reviews and come to independent, objective conclusions that must be reported concisely to non-experts, generally in the form of written reports. They must often defend their objective conclusions against pushback from auditees (cross-examination, if you will), such as managers of the departments or business units being examined.
The credibility of internal auditors is supported by specialized licensing and certifications, including the CIA (certified internal auditor), CPA (certified public accountant), CRMA (certified in risk management assurance), CISA (certified information systems auditor) and CFE (certified fraud examiner). In addition to certifying technical expertise, these designations indicate that the professional abides by a code of professional ethics. The Institute of Internal Auditors, which issues the CIA certification, requires internal audit professionals to adhere to a code of ethics based on four key principles: integrity, objectivity, confidentiality and competency.
When to Use Internal Auditing Experts
An expert with a background in internal auditing can serve counsel and their clients as an effective expert witness or consulting resource in a wide variety of circumstances.The following are just a few examples:
Civil dispute – compliance with injunctions
Two firms are engaged in a civil dispute that results in an injunction wherein one firm must cease certain marketing practices that harm the other party. The firm subject to the injunction asserts that it has a system of internal controls in place to ensure it does not engage in practices that would violate the injunction.
Enter the expert: Defending counsel retains an expert with a background in internal auditing to review the system of internal controls. The individual identifies a number of gaps, and works with the company on improvements. The enhanced system of internal controls is documented and filed with the court. The judge and opposing side agree to the program, and the dispute moves toward resolution.
Embezzlement scheme – internal investigation
An embezzlement scheme is reported through a company's internal hotline. Management engages outside counsel to perform a confidential review. Counsel engages an expert with a background in internal auditing to review the department in question and report back.
Enter the expert: Walking through key departmental processes with company personnel, the internal auditor quickly identifies exploitable gaps in internal controls and a number of unusual items and discrepancies that had been recurring over several years. The expert reports her findings to counsel, and management moves forward with legal action. As a follow-up, management asks the expert to assist with a remediation plan to strengthen internal controls and reduce the risk of future internal fraud.
M&A agreement – settling post-acquisition disputes
A large company agrees to acquire a smaller competitor. The purchase agreement includes a financial statement representation by the seller that internal controls are in place to ensure reliable financial reporting. The buyer agrees to allow the seller to continue operating with relative autonomy, and the deal closes. Months later the buyer has concerns about the financial reporting it is receiving from the newly acquired business.
Enter the expert: At the advice of counsel, the buyer engages an expert with a background in internal auditing to perform a review of the seller's accounting department. The auditor determines and documents that the department is not maintaining a sufficient system of internal controls to ensure accuracy in their reporting. The buyer asserts an indemnification claim against the seller to recover from the breach of contract resulting from the inaccurate representation of its internal accounting controls.
Insurance/reinsurance dispute – complex process analysis
A manufacturer of tech products transfers the risk of warranty claims to an insurance carrier, which utilizes a third party to process the intake and handling of claims from consumers. Separately, the insurance carrier transfers some of its risk to a reinsurer. When the insurance carrier tries to collect from the reinsurer, the reinsurer refuses to pay the agreed-upon coverage amount on the grounds that the warranty claim-handling process performed by the third-party processor was inefficient and overly expensive.The insurance carrier sues the reinsurer and engages an expert with a background in internal auditing to review the third party’s process.
Enter the expert: The expert performs an extensive, deep-dive analysis of the end-to-end warranty claim process. She is able to report that the high costs are justified given the complexity of the process. The expert’s instructive and persuasive report is presented to the court, the insurer prevails in its case, and the reinsurer remits the full agreed-upon coverage amount.
Whistleblower allegation –independent review and response
The federal government awards a large contract to a consulting firm. In the middle of the 10-month long project an anonymous party files a whistleblower claim against the consulting firm, accusing it of overbilling the government.
Enter the expert: The consulting firm engages outside counsel which in turn hires an expert with a background in internal auditing who embeds with the project team to document and analyze the complex daily process for recording and approving project expenses. The auditor determines that well-designed controls had been operating effectively since the start of the project to ensure the accuracy and completeness of key logs of daily expenses. He also determines that government representatives had approved all of the expense logs, and that the consulting firm billed only these approved expenses plus any profit margin previously agreed to in the contract. Based on the expert’s thorough and persuasive report, the government determines that the whistleblower’s claim is without merit and closes the file.
Experienced internal audit professionals offer many of the qualities counsel needs in a reliable and effective expert: specialized knowledge supported by recognized professional designations; a professional focus on independence and objectivity; the ability to analyze complex processes and scenarios and convey findings in clear and carefully considered written form; and experience defending conclusions verbally in the face of intense opposition. When looking for an expert, consider individuals with backgrounds in internal auditing.
© Copyright 2020. The views expressed herein are those of the author and do not necessarily represent the views of FTI Consulting, Inc. or its other professionals.
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The FTI Journal publication offers deep and engaging insights to contextualize the issues that matter, and explores topics that will impact the risks your business faces and its reputation.
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September 30, 2020
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