In readiness for an internal investigation: boards should be prepared to undertake complex and wide-ranging internal investigations. Develop a plan now to deal with the inevitable.

AuthorDewey, Lee M.
PositionCRISIS MANAGEMENT

IN TODAY'S REGULATORY CLIMATE, board members are increasingly being held accountable for monitoring company operations and acting decisively in response to alleged improprieties. One of the tools for discharging this duty is the corporate internal investigation. Over the past several years, the number and scope of such investigations have been growing for a number of reasons, including new whistleblower protections, enhanced law-enforcement activities, and more assertive independent auditors. Even so, board members and corporate representatives tend to view a whistleblower complaint or government investigation as an unexpected event. Thus, many are left unprepared when a genuine crisis hits.

It doesn't have to be this way. Like other business contingencies, the risk of financial wrongdoing and the subsequent need for an appropriate response can be planned for and managed effectively. Moreover, although internal investigations often raise sensitive and difficult questions, those questions can be anticipated. To be sure, there is no one formula that can be applied uniformly to every internal investigation. Boards must use a flexible approach that takes account of the particular circumstances presented by each investigation. Nonetheless, using the guidance set forth below and with advice from capable legal counsel, a forward-looking board can develop a coherent policy for conducting corporate internal investigations.

Corporate internal investigations typically present certain recurring questions and problems for board members to address. Based on our experience with investigations conducted for a variety of publicly traded and private organizations, we recommend that boards assess their readiness to undertake internal investigations and develop an appropriate policy in light of the following issues and criteria.

Growing demands

Over the past several years, the number and scope of corporate internal investigations have been growing. According to the President's Corporate Fraud Task Force, since 2002 the U.S. Department of Justice has obtained more than 500 corporate fraud convictions or guilty pleas, and charged more than 900 defendants and over 60 corporate CEOs and presidents. Moreover, published reports indicate that from Jan. 1, 2004 to Nov. 15, 2004, more than 135 investigations were conducted by the Department of Justice, the SEC, and corporations themselves concerning securities fraud and other financial misconduct.

Several factors are contributing to this trend:

* New whistleblower protections make it easier for employees to report potential wrongdoing.

* Regulators and law-enforcement officials are devoting more attention and resources to alleged corporate misconduct.

* Audit committee members and other directors, fearful of personal liability, are watching management and auditors more carefully.

* Independent auditors are spending more time on the audit process and are questioning management more often.

* Attorneys have new professional responsibilities to report evidence of wrongdoing.

Risk assessments and profiles

Although all organizations experience fraud, the types of fraud that occur in a particular organization typically...

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