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Unconventional internal audits - Litigation process

Tulasi S Sastri 
on 04 July 2015

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Internal Audit has been gaining importance over the years. This has been due to:

a. Statutory requirements including recent ones through the Companies Act 2013, like mandatory appointment of an Internal Auditor in certain cases, importance for Internal Financial Controls (IFC) under the Directors’ Responsibility Statement, where Internal Auditor could be of significant assistance to the Audit Committee on IFC,

b. Growing complexity in the way businesses are being conducted,

c. Limited feasibility for yearend Statutory Audit to cover all aspects desirable, and the need to rely on Internal Auditor’s Reports, and

d. Possibility for the Internal Auditor to review business processes in a more detailed manner, through continuous engagement, and being able to give recommendations for strengthening controls..

e. Consequently scope for Internal Audit is also extendingto many areas which were not covered earlier. Thus from Financial Operations like Accounts Payable, Cash and Bank, Revenue, Accounts Receivable, Payroll, Employee Reimbursements, Fixed Assets, and Financial Reporting, Internal Audit is extending to Operational areas and Other Processes  like Human Resources, Administration and so on. One of such unconventional areas is Litigation Process. Objectives for such an audit, and a few actual examples included here, give an idea to the reader on how Litigation Process Audit can be taken up.

Objectives

a. Review pre-litigation and litigation process from Governance perspective,

b. Identify reasons leading to disputes in Administration, Commercial, Employee Engagement and Project Execution processes, and

c. Advising the management on possible remedial measures to minimize scope for loss to the organization or for protecting its interests.

d. Review of legal merits or demerits of each case is outside the scope of Litigation Process Audit.

Property Related

A company entered into a Lease Agreement, for certain office space, and registered the lease. After installing its work stations in the entire floor and using the premises, exercised its option, under the terms of a registered lease agreement to vacate the premises and gave the requisite 2 months’ notice to the property owner, seeking refund of Rs 20 lac deposit, at the time of handing over. Got the partitions dismantled. On the appointed day owner’s representative took charge of the premises but did not refund the deposit. It was not feasible to hold on to the key, since it was an open floor with no doors. Later the owner declared that the property was not handed over, and made a counter claim on the company for property damages, which was higher than the deposit given by the company.

Here the company failed to take the benefit of registering the lease, since it could have enforced its rights through a Court of Law.

Employee Related

One employee who was onsite for 3 years returned to India on performance grounds, and submitted his resignation. In the meantime the company announced revision of certain allowances to his category of employees, with retrospective effect. He was not entitled to this general revision, but pleaded with the HR Manager to let him have a copy of the revision letter, to help him bargain better in his future employment. HR Manager obliged. On getting relieved, this employee filed a suite for arrears, based on the revision letter.

In this case HR Manager, by wrongly obliging the resigning employee, invited avoidable litigation.

Customer Related

Company signed a Master Service Agreement with a customer, commenced project execution, and received $ 3 million in progressive payments. Customer chose to terminate the contract, before completion, and demanded refund of the money paid, claiming that the software so far delivered was of no use to them. In large projects where claims and counter claims are made by both the parties, sharp, focused documentation, during project execution is essential for protecting the company’s interests.

Concluding Remarks

In all the above examples, what we see is the need to adequately bring awareness to the concerned managers, to avoid pitfalls in transaction execution, as a risk mitigation initiative.

For more articles from me, please read my book Translating Operations into Money – Cases in Business Management, available for online purchase at notionpress.com, Amazon.in or Flipkart or visit www.operationstomoney.com .

Thank you for your attention.
Tulasi S Sastri
FCA., CISA.


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