Day 5 of One Month to Better Investigations and Reporting

Many companies have an investigation protocol in place when a potential Foreign Corruption Practices Act (FCPA) or other legal issue arises? However, many Boards of Directors do not have the same rigor when it comes to an investigation, which should be conducted or led by the Board itself. The consequences of this lack of foresight can be problematic, because if a Board of Directors does not get an investigation which it handles right, the consequences to the company, its reputation and value can all be quite severe. The SEC considers a variety of factors around corporate investigations including: Did management, the board or committees consisting solely of outside directors oversee the review? Did company employees or outside persons perform the review? If outside persons, have they done other work for the company?

There is also role of the Sarbanes-Oxley Act (SOX) in internal investigations, most particularly for audit committees. Section 301 establishes certain requirements for Audit Committees, including: (1) Procedures for receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; (2) Procedures regarding the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters; (3) Authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties; and (4) Funding to engage advisors as it deems appropriate. 

In an article in the Corporate Board magazine, entitled “Successful Board Investigations” by David Bayless and Tammy Albarrán, partners in the law firm of Covington & Burling LLP write about five key goals that any investigation led by a Board of Directors must meet. They are: 

• Thoroughness - The authors believe that one of the key, and most critical, questions that any regulator might pose is just how thorough is an investigation; to test whether they can rely on the facts discovered without hav­ing to repeat the investigation themselves. Regulators tend to be skeptical of investigations where limits are placed (expressly or otherwise) on the investigators, in terms of what is investigated, or how the investigation is conducted. This question can be an initial deal-killer particularly if the regulator involved views an investigation insuf­ficiently thorough, its credibility is undermined. And, of course, it can lead to the dreaded ‘Where else’ question.
• Objectivity - Here the authors write that any “investigation must follow the facts wherever they lead, regardless of the conse­quences. This includes how the findings may impact senior management or other company employees. An investigation seen as lacking objectivity will be viewed by outsiders as inadequate or deficient.” I would add that in addition to the objectivity requirement in the investigation, the same must be had with the investigators themselves. If a company uses its regular outside counsel, it may be viewed with some askance, particularly if the client is a high volume client of the law firm involved, either in dollar amounts or in number of matters handled by the firm.
• Accuracy - As in any part of a best practices anti-corruption compliance program, the three most important things are Document, Document and Document. This means that the factual findings of an investiga­tion must be well supported. For if the developed facts are not well supported, the authors believe that the investigation is “open to collateral attack by skeptical prosecutors and regulators. If that happens, the time and money spent on the internal investigation will have been wasted, because the government will end up conducting its own investigation of the same issues.” This is never good and your company may well lose what little credibility and good will that it may have engendered by self-reporting or self-investigating.
• Timeliness - Certainly in the world of FCPA enforcement, an internal investigation should be done quickly. This has become even more necessary with the tight deadlines set under the Dodd-Frank Act Whistleblower provisions. But there are other considerations for a public company such as an impending Securities and Exchange Commission (SEC) quarterly or annual report that may need to be deferred absent as a timely resolution of the matter. Lastly, the Department of Justice (DOJ) or SEC may view delaying an investigation as simply a part of document spoliation. So timeliness is crucial.
• Credibility - One of the realities of any FCPA investigation is that a Board of Directors led investigation is reviewed after the fact by not only skeptical third parties but also sometimes years after the initial events and investigation. So not only is there the opportunity for Monday-Morning Quarterbacking but quite a bit of post event analysis. So the authors believe that any Board of Directors led investigation “must be (and must be perceived as) credible as to what was done, how it was done, and who did it. Otherwise, the board’s work will have been for naught.” 

Dan Chapman, Chief Compliance Officer at Vimpelcom, has said this is the time for a very frank conversation with your Board about what such an investigation will entail. Costs must be adequately discussed to set proper expectations. These include both direct costs and, what Chapman believes may be even more important, a discussion of indirect costs to the company. He noted that “the biggest cost to a company during an investigation is the diversion of management resources” and, as he further explained, “kind of everything stops to focus on the investigation.” This indirect cost comes through largely the time commitment of senior management. He further explained, “if senior management has to commit 20% of their time, that’s 20% that’s not going towards revenue generating, shareholder value protecting activities.” 

Finally Jonathan Marks, a partner at Marcum LLC has noted after notification of serious allegations, Boards should take the following steps:

• Consider creating a Special Committee to conduct the investigation;
• Establish a committee charter;
• Preserve the electronic and hardcopy documentation environment;
• Communicate with external auditors; and
• Plan potential communication with the SEC, DOJ, and the relevant stock exchange. 

Marks also notes that while a special committee might be necessary in certain rare circumstances, the board should try to avoid forming a special investigative committee to oversee the investigation if its audit committee is composed of independent and disinterested directors that are suited for the task. A special committee must be disbanded at some point (usually once the investigation is completed and before the restatement process begins), and the disbanding could become a complicated news item.  Conversely, if the audit committee oversees the investigation, then, once the investigation is complete, the audit committee can pivot back to its normal role, which would include overseeing the actual restatement process. Investigations overseen by the audit committee also benefit from the positive relationship that the audit committee chair usually has with the audit partner of the company’s external auditor.  

Three Key Takeaways

1. The Board should have a written protocol for investigations prepared in advance.
2. Any Board led investigation must be both credible and objective.
3. The investigation must be thorough but the Board can be cost effective.