In the post-Enron and Sept. 11 era and in the midst of Sarbanes-Oxley and the Patriot Act, financial markets and the general public are placing accountability on CEOs, CFOs and boards of directors as never before. When questions arise over compliance with financial reporting standards, regulatory requirements, corporate ethics or potential white-collar crime, corporate management and directors increasingly are performing independent internal investigations to determine whether a violation has occurred and how best to rectify the situation before it becomes a “situation.”
“In our experience, examples of the many risks and concerns facing directors and management range from issuing financial statements with material misrepresentations to purchasing a foreign subsidiary that may have had business dealings with an embargoed nation to discovering a kick-back scheme between your sales staff and your largest customer,” says Karen Fortune, one of Tauber & Balser, P.C.’s investigative services practice leaders in the Forensic Accounting and Litigation Services Group.
Smart Business asked Fortune to elaborate on steps that can be taken by management and directors when faced with these types of situations before initiating a corporate internal investigation.
What is the first step management or a board of directors should take before initiating an internal investigation?
It is critical to engage an attorney experienced in navigating the waters ahead, particularly when dealing with financial reporting, regulatory or enforcement issues. In addition, depending on the nature of the investigation, you will need to consider retaining other experts. For example, in an environmental matter, environmental or chemical engineers might be required to identify levels of contamination and possible human health impacts. Similarly, in a financial matter, forensic accountants can provide you with the ability to narrow or pinpoint fraud risk areas, interview personnel and trace assets, among other things.
Key traits to look for in your counsel and other experts are specific experience with your issue and the ability to handle the matter discreetly. For a public company that suspects material misrepresentations within its financial statements, accounting experts with experience consulting and/or testifying in similar cases and legal counsel with a track record handling these matters may be desirable.
What type of reaction strategy should an organization follow?
Once an investigative matter has been identified and confirmed, there are many reaction strategies to consider. Each strategy comes with its own set of timing issues and consequences. For example, a company may choose to deal with the problem internally through terminations, improved internal controls and recovery of losses through insurance coverage, if applicable.
Alternatively, a company may wish to pursue recovery of losses through the civil courts as a means of enforcing its corporate policies and to maximize recovery for stakeholders. This allows management to control the investigation, including the communication of the result.
If the investigative issues have possible criminal or regulatory ramifications, there may be an initial tendency to notify enforcement authorities. However, it is useful to know that once a matter is ‘turned over’ to enforcement authorities, a company may surrender its control over the investigation. Authorities may seize all relevant documentation and computer hard drives or impede your ability to conduct your own internal investigation to determine what actually happened, who was involved and whether recovery of damages is possible. Many companies seek to get their hands around a situation prior to involving authorities to mitigate any damages and perhaps recover monies from the wrongdoer.
On the other hand, in some instances, management may have no desire or hope for recovery of damages. Prosecuting the wrongdoer demonstrates quick action and communicates a no-tolerance message to the organization and the public. A candid conversation with legal counsel should lead you to the proper decision for your business.
What else should be considered?
It goes without saying that an internal investigation is not an inexpensive undertaking. Thus, management must determine its goals at the outset, i.e., recovery of damages from the wrongdoer or an insurance policy; mea culpa plea to SEC, DOJ or EPA to mitigate punitive assessments; overhaul of internal controls system to lower the risk of future loss; or criminal prosecution of the wrongdoer, etc. Companies can reduce the interruption to day-to-day operations, leverage the experience of professionals and, in many cases, mitigate the damages that otherwise would occur by involving experienced counsel and investigative experts at an early stage.
KAREN FORTUNE is an investigative services practice leader with Tauber & Balser, P.C. in the Forensic Accounting and Litigation Services Group. Reach her at firstname.lastname@example.org or (404) 814-4968.