Corporate > AG Deal Diary > Top 10 Topics for Directors in 2018: Internal investigations
17 Jan '18

Internal investigations

Boards are increasingly confronted with the possibility of wrongdoing implicating the company or its employees. These situations can come to the attention of the board in a number of ways, including from private-party lawsuits, internal audits, whistle-blower tips and governmental inquiries.

How the board or appropriate board committee responds to a particular situation will have important implications for the ultimate effects on the company. The requirements and atmosphere created by laws such as Sarbanes-Oxley and Dodd Frank have heightened the scrutiny of the actions (and the inactions) of boards, including individual directors, in the context of allegations of violations brought to their attention. The board will be called upon to determine what type of review of the allegations should be undertaken, including whether an internal investigation conducted under the auspices of a committee of independent directors (such as the audit committee or a special committee established solely for this purpose) is warranted.

The decision whether or not to undertake an independent internal investigation requires careful consideration. In certain situations, the decision to conduct such an investigation is clear because of the credibility of the initial evidence and/or the nature of the allegation (e.g., if true, it would have a material impact on the legal position or the operations of the company). Due to these factors and other considerations, including good corporate governance, the board could very well find that the most prudent and responsible course is to conduct such an investigation. Additionally, it has become ever more common for the company’s independent auditors to expect that the company will conduct such an investigation in many situations, especially where the allegations could implicate financial matters or involve possible fraud.

Once it is determined that an internal investigation is warranted, the board, in close consultation with counsel, should decide (a) who should oversee the investigation, including whether a committee of independent directors, such as the audit committee or a special committee, should be used to foster both the reality and perception of independence; (b) the scope of the investigation, taking into account the imperative of learning all the relevant facts in an efficient and cost-effective manner; and (c) which professionals should conduct the investigation (i.e., should the investigation be conducted by inside or outside counsel). In these situations, it is always important to take appropriate steps to preserve attorney-client privilege and confidentiality.

Quite often, it is determined that experienced outside counsel will be retained because of the nature of the allegations and to build additional credibility for the independence of the investigation with third parties, such as the independent auditors, and potentially with governmental agencies. Counsel should have experience in dealing with the myriad issues that accompany an investigation, including possessing an extensive knowledge of the relevant law implicated by the allegations; taking the steps necessary to maintain privilege; ensuring the appropriate conduct of interviews, particularly those of current and past employees; retaining and working with other professionals whose expertise will be required, such as forensic accountants; counseling the board on the difficult issue of whether, and when, to self-report to relevant governmental agencies; and recommending remedial measures to deal with any issues that arise out of the investigation.

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