Auditing of third parties is critical to any best practices compliance program and an important tool in operationalizing your compliance program. This is a key manner in which a company can manage the third party relationship after the contract is signed and one which the government will expect you to engage in going forward.
You should plan out four to six weeks in advance, you should perform the audit with your legal counsel’s lead to preserve privilege, work with the business sponsor to establish key business contacts, discuss audit rights and processes with the third party, you should prepare initial document request lists for financial information queries, take the time to review findings from previous audits and resolutions and also review details of opened and closed internal investigations, if there are any Code of Conduct questionnaires available take care to review and finally be cognizant of any related Department of Justice (DOJ) and Securities and Exchange Commission (SEC) enforcement actions.
The next step is to determine the entry points of foreign government involvement; (1) direct and (2) indirect. The direct category includes: customs and duties, corporate taxes and penalties, social security or national insurance issues for employees, obtaining in-country visas and work permits, public official gifts and entertainment, training of and attendant travel for employees of government owned entities, procurement of business licenses and permits to perform work and, finally, areas around police escort and security. In the indirect category, some of the key areas to review are: customs agents and freight forwarders, visa processors, commercial sales agents, including distributors and, finally, those who might be consultants or other channel partners.
Document review and selection is important for this process, you should ask for as much electronic information as possible well in advance of your audit. It is much easier to get database records for internal audits than audits of third parties. Try and obtain records in database or excel format and not simply in .pdf. Request the following categories of documents; trial balance, chart of accounts, journal entry line items, financial and compliance policies, prior audited financial statements, bank records and statements, a complete list of agents or intermediaries and revenue by country and customer.
Your lead interviewer needs to be culturally sensitive, patient and must negotiate a good working relationship with the forensic auditors on your audit team, who will be reviewing the documents from their professional perspective. Regarding potential interviewees, focus on those who interact with government entities, foreign government officials or third parties, including those personnel involved with:
- Business Leadership
- Sales/Marketing/Business Development
- Corporate Functions: Human Resources, Finance, Health, Safety and Environmental, Real Estate and Legal.
For the interview topics, there are several lines of inquiry. Remember this is an audit interview, not an investigative interview. You should not play ‘got-cha’ in this format. You should avail yourself of the opportunity to engage in training while you are interviewing people. The topics to interview on included:
- General policies and procedures;
- Books and records pertaining to FCPA risks;
- Test knowledge of FCPA and UK Bribery Act including facilitating payments and their understanding of your company’s prohibitions;
- Regulatory challenges they may face;
- Any payments of taxes, fees or fines;
- Government interactions they have on your behalf; and
- Other compliance areas you may be concerned about or that would impact your company, including: trade, anti-boycott, anti-money laundering, anti-trust.
In the review of the General Ledger (GL) accounts, you should consider commission payments to agents and representatives, any facilitating payments made, all payments around travel, meals and entertainment, payments made around training, gifts, charitable contributions, political donations and sales and promotion expenses. If there were payments made for customs or freight forwarders and other processing agents, permits, licenses, taxes and other regulatory expenses should be reviewed. Additionally any entries pertaining to community contributions and social responsibility payments should be assessed and, finally, a review of any security payments, extortion payments, payments to legal consultants or tax advisors or fines and penalties should be considered.
Regarding bank accounts and cash disbursement controls, you should review the following:
- Review controls around bank accounts and cash disbursements;
- Identify and review authorized signers, approval levels, and bank reconciliations;
- Ensure all bank accounts are included in the General Ledger;
- Identify and review certain bank and cash disbursement transactions;
- Identify offshore bank accounts.
In the area of cash funds review the following:
- Review controls around petty cash funds;
- Ascertain processes in place regarding disbursement and reconciliation of cash funds;
- Identify and review payments to government officials, agents, or any unusual or suspicious activities; and
- Identify and review certain bank transactions and test for any improper payments.
For gifts, travel and entertainment, you should explore payments made through employee-reimbursed expenses, scrutinize for any suspicious expenses submitted, expenses lacking adequate documentation, incorrect posting; and identify and review accounts associated with gifts, meals, entertainment, travel, or promotion. In the area of payroll, consider the risks around the use of ghost employees, hiring of relatives of government employees, and the use of bonus payments and be sure to request a payroll listing and review for any such persons.
You should review GL accounts and expenses for related items. In taking a look at payments under local law, you should obtain list of payments to the government required by local laws and identify and review payments to government authorities or employees, customs authorities or agents, income taxes authorities or license requirements. For payments made to third parties, you should review commission and expense payments for compliance with company policy and also trace payments to the third party’s bank account.
Three Key Takeaways
- Be prepared.
- It is not an investigative interview but an audit interview.
- Listen, listen, listen.
Auditing of your key, high-risk third parties is a key component of your 3rd party program.Click to tweet
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.