Details published by The Telegraph have alleged that a proof of funds document was falsified and handed to the English Football League when Gino Pozzo took sole control of the club from his father Giampaolo in 2014.
The EFL is investigating the claims and now Watford have opened a separate probe.
A statement from the club’s chief executive Scott Duxbury read: “Watford Football Club was recently contacted by the EFL in relation to matters concerning a proof of funds document for £7m provided to the EFL by Hornets Investments Ltd in 2014 in order to ratify a change in Hornets Investments Ltd shareholding.
“The club had no prior knowledge of any concerns about the authenticity of the document and Hornets Investments Ltd has invested over £20m into the club since the proof of funds 2014 document.
“The club takes this matter extremely seriously and has instructed independent solicitors to carry out an investigation into relevant matters and provide the EFL with the solicitor’s report early next month. The EFL has indicated it is happy with this course of action.
“In light of the ongoing investigation it would be inappropriate to comment further at this time.”
Watford could face a fine and points deduction if found guilty of the allegations.