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Fraud Prevention Tip #29: Countering Risks from Third-Party Relationships

One risk area of special concern comes from relationships with third parties. Here’s why.

Your organization’s relationship with employees is governed by law, policy, and operating procedures. There exists a daily ability to supervise, monitor, reward, and discipline individuals. Information needed for these tasks is available with few barriers. Employees generally share the organization’s ethical standards. Deviation in individual behavior from those standards is often detectable.

Your organization’s relationship with third parties is determined in large part by the documents governing the relationship. Examples include contracts, purchase orders, engagement letters, loans, leases, sales agreements, standard terms and conditions, and other documents. Third parties have legitimate business interests that may at times be at odds with those of their customers and clients. If wrongdoing by third parties is suspected, it may be difficult or impossible to obtain records needed to prove or disprove the suspicion.

Suspected fraud by those third parties with a trust relationship can be extremely challenging to pursue. Be as prepared as possible for these challenges. Make sure that the document that defines the relationship is clear on matters of fraud and other wrongdoing.

Countering Risks from Third-Party Relationships

Managing Fraud Risks in Procurement and Contracting – This program addresses the fraud risks inherent in procurement and contracting, and will present solutions for managers and auditors interested in guarding their organizations against the costs and other negative consequences of misconduct and fraud.

Where appropriate, make your organization’s Code of Conduct an integral part of any third-party relationship documents. Consider having the third party acknowledge their awareness and compliance with your Conduct standards.

Also include appropriate Right to Audit language in third party ‘deal documents’ – again, where appropriate to do so. We recommend strong Right to Audit language in:

One last thing. Don’t just have Right to Audit provisions. Perform detailed audits of third parties performed by subject matter experts. If you’re not quite sure where to start, reach back to me. I’ll walk you through it.

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”