Auditing in an Adversarial Environment

by Chris Campos

Editor's Note: This article was taken from the keynote speech given to the Insurance Investigative Accounting and Auditing Conference in New York City.

As an accountant who has been involved in the field of investigative auditing for over 30 years, I have seen many barriers or problems which are inherent to performing the scope of work required by our clients.

When an investigative auditor initially becomes involved in reviewing a claim, he or she is placed in an environment alien to most accountants. Our counterparts in financial auditing are, in virtually all cases, reviewing the books and records of one of their clients. In those instances the client is pursuing a goal and the accountant is hired to assist him, within the bounds of the ethics and principles set forth by the bodies that govern the auditor's standards.

On the other hand, when investigative auditors start their assignments, they are faced with a totally different environment. Since they are not representing the claimant, an "adversarial" relationship is often perceived by the claimant when the investigative auditor arrives on the scene - much like a visit from the IRS.

At the initial meeting auditors must establish an atmosphere of confidence and cooperation with the goal of reaching an equitable evaluation. If the auditor expects the claimant to be forthright and cooperative, he or she must be equally candid. In most instances this goal can be achieved if the investigative auditor defines his role -- to neither overstate nor understate the claim.

Financial auditors reconcile numbers that appear on the operating statement, the balance sheet, and other financial statement provided by the client. Financial auditors reconcile those numbers to source documents such as invoices, purchase orders and check registers. If those numbers agree, the auditor ticks off the work papers and moves on to another procedure.

An investigative auditor, however, is attuned to looking behind the transaction and the logic that is inherent in the presentation made by the claimant. The kinds of questions that are posed by the investigative auditor include: Does this make sense? Does an alternative approach address the issue better? How do I verify various assumptions on what would have happened if the incident had not occurred? Are there other unstated factors that would contribute to the same result? What records are pertinent to evaluate the claim? Maybe the amounts should not reconcile!

Maintaining the cooperation of the claimant

In the course of performing his or her assignment in this "adversarial" environment, the investigative auditor should strive to maintain a spirit of cooperation with the claimant, however tenuous. Only with cooperation can the auditor obtain information necessary to properly review and analyze the claim Only then can the auditor draw conclusions that provide an equitable evaluation. During the initial stages of the investigation, the auditor must refrain from displaying his or her knowledge of the business and his or her perceptions or conclusions.

The auditor should approach each assignment with no preconceived ideas or conclusions based on the limited information provided in the claim presentation. If the temptation to draw early conclusions and preconceived ideas is not resisted, the auditor may find the door closed to any future document requests, answers to questions, and/or cooperative efforts Too often, investigators make assumptions in the early stages of their investigation that may direct them down the "primrose" path.

Identifying and obtaining records

In the course of the auditor's work, the question always arises as to what records are essential and what records are available. Quite often identifying the records you wish to obtain becomes a problem due to insufficient or ineffective communications. For example, the auditor may ask for the cash receipts journal but that record may be referred to universally in the claim ant's company as the "blue book." A description of the type of information necessary and one or perhaps several of the most common names for that document will usually result in receiving what is required.

Another situation that must be avoided is to allow the claimant to furnish only those document which it considers essential to the claim evaluation On occasion, the claimant furnishes the auditor with all the invoices and other documents which it states will support the claim and then resists requests for additional documentation. The claimant may insist that "What we gave you is sufficient!" Other times the claimant or plaintiff enters into a stipulation with the defendant's attorney to only produce documents the plaintiff relied upon to prepare the claim.

An investigative audit procedure is to review the documents supporting the claimed methodology in order to under stand the underlying premises and implications of the claimant's calculation. Mathematical and clerical errors, as well as obvious errors in theory or misunderstandings in insurance are often discovered. However, in either of these situations, there should not be total reliance on the claimant to produce supporting documentation or reliance on a cursory review of documentation to detect mathematical and clerical errors. It is the insurer's or defendant's prerogative to seek professional assistance. Unless the claimant is naive, the claim should match perfectly with the documents provided as support.

If, however, an analytical review of the claim is desired, the accountant must have access to all of the books and records related to the issues in the claim and make his or her test selection. The test and/or document request cannot be dictated by the claimant. The investigative accountant must have available documents other than those used to prepare the claim. He or she should attempt to review the documents claimant considered and ultimately decided not to use. These may provide a totally different picture.

Although a broad range of documents may initially be requested, the experienced investigative auditor knows that the door must be kept open to obtain additional records. As the audit progresses, the auditor will usually find the need for additional information, clarification or reconciliation based on the original records he or she has reviewed. Insist that they be produced.

After a fire or flood, the investigative accountant may find that many of the pertinent documents have been destroyed. This is when "creative" thinking is required The auditor must identify other ways of obtaining the same information. If the sales journal is unavailable, an analysis of the beginning and ending accounts receivable balances and customer payments received will result in the amount of sales made. Invoices, as well as other reports, are often created in duplicate or triplicate. Find out who maintains the second or third copy.

In preparing a claim, certain assumptions are usually made by the claimant. In those instances that assumptions may not be verifiable or supportable by use of the claimant's own records, the investigative auditor must seek industry sources that are available to confirm or deny them. Two such categories are market research and public sources of information.

Market research can be something as sophisticated as a marketing study specifically performed by an independent consultant to assist in the verification of the claim, an inquiry of a knowledgeable third party, or a variety of other resources.

An equally important method of verifying the claimant's assumptions or gathering evidence when all or most of the vital information has been destroyed is to obtain information from public sources. At Campos & Stratis, we have been obtaining such information from the inception of our firm An information and research center was created, which we believe was the first of its kind for an investigative accounting firm and possibly the only one today.

While no investigative auditor can guarantee that all barriers to an objective evaluation of a claim will be removed, the professional investigative auditor can alleviate most conflicts by (1) accepting his or her role in an "adversarial" climate, (2) promoting the cooperation of the claimant, (3) identifying and obtaining necessary records, and (4) confirming assumptions through market research and public sources of information. In that event both the claimant and the defendant may achieve equity.

Chris Campos is senior partner and founder of Campos & Stratis, and chairman of the conference at which this speech was delivered. [Reprinted by permission from Claims Magazine, issue December 1990.]

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