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 [email protected] or
(404) 814-4968.