Audit committees need independent counsel: this is best practice if an audit committee wants independent advice or needs an independent investigation.

Author:Lipman, Frederick D.
Position:AUDIT COMMITTEE

There is some difference of opinion as to whether the audit committee of the board of directors of an organization (whether public, private, or nonprofit) needs independent counsel for the purpose of advising the audit committee and for the purpose of conducting internal investigations.

Those who advocate using internal personnel for these services argue that this is more cost efficient. Although it is true that there is a cost to using independent counsel, there is also a cost, which could be exorbitant, from the failure to properly advise the audit committee and to properly investigate accounting, auditing, or enterprise risk issues. Moreover, failure to use completely independent counsel for the investigation can create the appearance of a "cover-up" and deprive the organization of any "cooperation credit" with governmental authorities.

Complaints made to the audit committee about accounting, auditing, or enterprise risk issues are sometimes investigated by internal personnel who do not possess either the forensic skills necessary to uncover all of the relevant facts or have the independence from top management that may be necessary to conduct a full and fair investigation. These internal personnel may be members of the HR department, internal auditors, or inside counsel. Even a transactional corporate lawyer who serves as inside counsel may not have the necessary forensic skills. There is no required training to become an internal auditor that necessarily provides the auditor with the skills to interrogate witnesses. Members of HR departments typically have even less qualifications to do so.

Internal investigations by non-legal personnel may not have the protection of the attorney-client privilege or the work product doctrine and may be discoverable by third parties, including shareholders. Likewise, even an investigation by an inside counsel who is also an officer of the organization may not necessarily be protected by these doctrines. Each of these internal personnel are dependent for their jobs and their compensation on the goodwill of top management. When an internal investigation is commenced, no one can be absolutely certain that there is no culpability of top management in the accounting, auditing, or risk issues.

Risk of being conflicted

If any outside counsel is being used to investigate accounting, auditing, or enterprise risk issues, it is not unusual for top management to prefer that such investigation be conducted by...

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