Focus on risk management

Accounting and financial professionals report that risk management has gained a new focus in their industries. While the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and other regulatory changes are expected to incentivize solid risk management practices, designing a structured program to manage risk effectively and efficiently and deliver top value in the process remains the greatest challenge. Background investigations, whether for client acceptance or retention, employment, subcontracting, asset determination, loan transaction, vendor evaluation and just about any business purpose are now considered an integral part of most risk management programs.

Our annual review of literature on the use of background investigations by accounting firms confirms that a risk-based approach has become common practice driven by the requirements of the accounting and auditing standards, pressure from professional liability insurers, federal and state statutes, and case law that has potentially expanded liability to a broad group of users of financial statements and by provisions of Dodd-Frank, particularly since the act brings increased exposure under the Foreign Corrupt Practices Act of 1977 (FCPA).

Since 2002 auditors of SEC-registered public companies have been required to conduct some type of a background investigation before taking on or continuing an engagement. Under auditing standards effective in January 2009, which mandate that firms adopt quality control standards, all accounting firms, whether involved in an SEC practice or not, are required to "establish policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide the firm with reasonable assurance that it will undertake or continue relationships and engagements only where the firm has considered the integrity of the client, including the identity and business reputation of the principal owners, key management, related parties, and those charged with its governance, and the risks associated with providing professional services in the particular circumstances."  

When an accounting firm conducts an audit, it is not necessarily able to predict why a claim of negligence may arise or where a plaintiff may reside or otherwise be able to bring a lawsuit. In effect, auditors must often assume the worst, even if that appears to be fairly remote. Under this approach, any form of negligence could result in liability to a large class of potential plaintiffs who, with 20-20 hindsight, may be characterized as "foreseeable." Accounting firms should consider this perspective when they assess risk and the cost effectiveness of a background investigation. For firms involved with high risk clients, transactions with public companies, transactions involving public or private offerings and clients with multistate operations, this means that a thorough due diligence at the outset is warranted and periodic updates are advisable, whether or not statements of auditing standards mandate a background investigation.

Spotlight on SI's enhanced asset and encumbrance investigation

As part of our investigation strategies for this product, we now offer more comprehensive information regarding real property records, such as mortgage details, assessed, market and comparable values, and assessor's maps. This is in addition to searches for corporate holdings, various trusts, family-limited partnerships, limited liability companies, charitable foundations, lawsuit payouts, judgment awards, vehicle, aircraft and watercraft ownership, and purpose-specific media searches. For further information and a complete list of the strategies included in this product, please see our products page.