Internal auditors and the law.

Author:Fargason, James Scott

The courts are beginning to recognize that the work of internal auditors may represent a rich cache of legal evidence.

IN THE PAST DECADE, the number of U.S. court cases involving internal auditors has increased dramatically. Courts are regularly citing internal audit workpapers and reports in a number of legal opinions. Additionally, investigations performed by internal auditors are frequently relied upon by juries and judges during the judicial fact-finding process.

The cases involving internal auditors cover the legal spectrum, including both civil and criminal cases, as well as litigation involving state and federal administrative agencies. Additionally, the United States Congress and many state legislatures are increasing their reliance on internal audit reports in drafting legislation.

This reliance on workpapers and reports facilitates the legitimization process that the internal auditing profession is undergoing. Judges and attorneys are beginning to recognize the wealth of evidence that can be gleaned from well-documented audit findings.

* Workpapers as Evidence

An auditor's workpapers alone may not be the deciding factor in a case, but they are often used in conjunction with other evidence to reach a fact-finding conclusion. For example, in Langston v. ACT(1), there was some question about whether a high school student seeking admission into college had cheated on his American College Test (ACT). After the student had taken the test for the second time, ACT noticed that the student had significantly increased his score from the previous test.

ACT, through its internal auditor, conducted an investigation of the incident to determine whether any impropriety had occurred. The court cited the use of ACT's internal auditor to conduct the investigation and apparently placed some degree of reliance on the results of the auditor's findings. The court stated:

This audit indicated that plaintiff's December results were inconsistent with the results that would be expected for an examinee with plaintiff's self-reported high school grades.

Based in part on the internal audit report, the court concluded in favor of ACT. The court reiterated that ACT was justified in its suspicions and emphasized that the student was given an opportunity to retake the examination.

The use of the internal audit report in the Langston case mirrors the way courts usually employ the work product of internal auditors when conducting a fact-finding analysis. If the work of an internal auditor is cited in a legal opinion, the work is usually an enhancing rather than a determinative factor.

In some cases, however, internal audit documentation has proven to be the controlling factor. In such cases, the probative value of the evidence generated by an internal audit department proves to be substantial enough to determine the outcome of the case. In other words, the internal audit documentation has proven to be the sole basis for the court's ruling. Although these cases are rare, they exist.

For example, in Chilson v. Metropolitan Transit Authority,(2) at issue was whether a federal court should have granted a motion for a new trial based on the findings documented in an internal audit report. Chilson, a Metropolitan Transmit Authority (MTA) employee, was terminated, allegedly because of the criticism he voiced over a multimillion-dollar contract entered into by the MTA. Chilson argued that he was discharged by the MTA in retaliation for his criticism. When the case went to trial, Chilson lost.

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