Examination of records: Overview, definition, and example
What is examination of records?
Examination of records refers to the right of a party—such as a client, regulator, or business partner—to review and inspect another party’s books, financial statements, or other relevant documents. This right is often included in contracts to ensure transparency, compliance, and accountability.
For example, a business that hires a vendor to manage its finances may include an examination of records clause allowing it to audit the vendor’s financial records to verify proper handling of funds. Similarly, investors may have the right to examine a company’s records to assess its financial health.
Why is examination of records important?
Examination of records is crucial for maintaining trust and ensuring compliance with financial, legal, or contractual obligations. It helps prevent fraud, mismanagement, or financial irregularities by allowing parties to verify records firsthand.
For businesses, this right is particularly valuable in agreements involving financial transactions, tax reporting, or regulatory compliance. Government agencies and auditors also rely on this right to ensure businesses adhere to laws and industry standards.
Understanding examination of records through an example
Imagine a company hires a third-party payroll service to handle employee salaries and tax payments. To ensure compliance with tax laws and verify that payments are made correctly, the company includes an examination of records clause in the contract. This allows the company to review payroll records at any time to confirm accuracy and prevent fraud.
In another scenario, an investor agrees to provide funding to a startup but includes a provision allowing them to examine financial records quarterly. This ensures the investor can track how funds are being used and assess the company’s financial stability.
An example of an examination of records clause
Here’s how an examination of records clause might appear in a contract:
“The Company shall maintain complete and accurate records related to the performance of this Agreement. The Client shall have the right, upon reasonable notice, to examine and audit such records during normal business hours to verify compliance with the terms of this Agreement.”
Conclusion
Examination of records ensures transparency and accountability in business and financial transactions. By granting a right to review financial or operational documents, businesses and stakeholders can protect their interests, prevent fraud, and ensure compliance with legal and contractual obligations.Including a clear examination of records clause in contracts can help mitigate risks, build trust between parties, and provide a structured process for verifying financial and operational integrity.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.