Audit Planning for a Class Action Filing with Andrew Cottrell

​​​​​​​​​When a financial services organization is involved in a class action filing, internal audit needs to be prepared to evaluate risks and conduct reviews. Andrew Cottrell, associate director and head of Class Action Client Service for Institutional Shareholder Services Learn, describes best practices for a class action process.

The interview was hosted by Cassian Jae, director of The IIA’s Financial Services Audit Center. 

A summary of the highlights is below, with further details included in the AuditCast.

Highlights from the AuditCast​​

What is a class action?

A class action is a legal process that is available in markets such as United States and Canada where multiple investors can combine resources to recover losses from alleged fraud.

Why would a bank or financial institution participate in a class action filing?

For example, a bank may want to offer a class action as a service, or an asset manager may want to try to recover a clients’ losses.

What risks are there for a financial institution participating in a U.S. class action filing? What risks are there to participate in a non-U.S. class action filing?

From the U.S. perspective, there is not really a risk, other than minor time investment. The real risk is on the non-North American perspective because there are fees associated with joining a class action law suit. In addition, outside of North America the participants in the lawsuit are disclosed, which could affect their professional relationships.

Why is it important for internal auditors to include class action filings in their audit plans?

Class action filings can result in the recovery of significant money. On behalf of my organization’s clients, we will recover between $400 and $600 million dollars. So a strong audit plan needs to be in place to monitor the process. For example, one of our clients recovered $78 million, but if the process were not handled correctly, that client would not have recovered this money.

When auditing class action filing, what are some key points to include in the review?

First and foremost, are you aware of all actions? Are you making sure you are filing properly and timely? Are tracking from point of filing through all initial disbursements and residual disbursements. This could take an average of four years, up to ten years. So if you are doing this inhouse, make sure you have a strong control mechanism in place to account for normal staff turnover over a long period of time. Or, if you are having another party doing it, ensure that they are tracking it to recover all of the money on your behalf.

When designing a successful class action process, what are some best practices to have in mind?

Here are five key questions to consider:

  1. Am I aware of every action in the marketplace?
  2. Can I easily identify the actions where I need to focus time and energy?
  3. If I identify these, can I efficiently and accurately file those claims?
  4. Do I have a strong reporting tool for tracking disbursements?
  5. Am I certain I am receiving the proper payouts at the end, and are those checks being deposited in the proper accounts at my bank?​

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