internal investigation what to expect

Attorney Client Privileged Communication

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Internal Corporate InvestigationsInternal Corporate Investigations

What to ExpectWhat to Expect

What is ExpectedWhat is Expected


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Investigation TriggersInvestigation Triggers

Regulatory InquiriesRegulatory Inquiries

WhistleblowersWhistleblowers

Internal AuditInternal Audit

Independent AuditorsIndependent Auditors

Shareholder Derivative ClaimsShareholder Derivative Claims

Bankruptcy InvestigationsBankruptcy Investigations


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Investigative GoalsInvestigative Goals

Discover the facts.Discover the facts.

Gather the facts in a systematic fashion so that those who Gather the facts in a systematic fashion so that those who review the investigation and its results are comfortable review the investigation and its results are comfortable that the process of fact-gathering was independent, that the process of fact-gathering was independent, competent, and thorough; i.e., a credible investigation.competent, and thorough; i.e., a credible investigation.

A fair and balanced assessment of facts.A fair and balanced assessment of facts.

Recommend remedial action.Recommend remedial action.


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Key Participations in ProcessKey Participations in Process

A u d i tC o m m i t t e e

B o a r d o fD i r e c t o r s

C o m p a n yM a n a g e m e n t

In t e r n a l A u d i t

O u t s i d eIn d e p e n d e n t A u d i t o r s

Th e R e g u l a t o r s

S h a r e h o l d e r sIn d e p e n d e n tC o u n s e l

In d e p e n d e n tA c c o u n t a n t s

Inte rna l E xte rna l


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Independent OversightIndependent Oversight

Audit Committee IS responsible for investigation.Audit Committee IS responsible for investigation.

Each Audit Committee must establish procedures for the Each Audit Committee must establish procedures for the receipt, retention, and treatment of complaints regarding receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, or auditing accounting, internal accounting controls, or auditing matters, including procedures for the confidential, matters, including procedures for the confidential, anonymous submission by employees of the issuer of anonymous submission by employees of the issuer of concerns regarding financial reporting systems,concerns regarding financial reporting systems,


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Independent OversightIndependent Oversight

No SEC mandate for specific procedures that Audit No SEC mandate for specific procedures that Audit Committees must follow to resolve complaints.Committees must follow to resolve complaints.

Audit Committees have flexibility to develop and utilize Audit Committees have flexibility to develop and utilize procedures appropriate for the circumstances.procedures appropriate for the circumstances.

Ultimately, the Audit Committee must make the decision Ultimately, the Audit Committee must make the decision as to which resources to use and processes to follow.as to which resources to use and processes to follow.


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Independent Law FirmIndependent Law Firm

Investigation undertaken by substantial law firm.Investigation undertaken by substantial law firm.

Good reputation.Good reputation.

Experienced.Experienced.

Good working relationship with SEC and DOJ.Good working relationship with SEC and DOJ.

Can work with Company auditors. Auditors find lawyers credible.Can work with Company auditors. Auditors find lawyers credible.

Want to avoid perception that law firm is in any way beholden to Want to avoid perception that law firm is in any way beholden to Company or senior management.Company or senior management.


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Independent Forensic AccountantsIndependent Forensic Accountants

Generally necessary to engage, especially if complicated Generally necessary to engage, especially if complicated accounting issues exists.accounting issues exists.

Also should be independent of Company and Also should be independent of Company and management, although not required. Generally the management, although not required. Generally the forensic group must be independent.forensic group must be independent.

Accountants should be retained by counsel, not the Audit Accountants should be retained by counsel, not the Audit Committee, to maintain privilege.Committee, to maintain privilege.


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Tone and SubstanceTone and Substance

Audit Committee, as a matter of Audit Committee, as a matter of substance and tonesubstance and tone, must , must express a willingness to actively oversee the investigation and express a willingness to actively oversee the investigation and assume responsibility for its resultsassume responsibility for its results

Investigators report directly to the Audit Committee, usually Investigators report directly to the Audit Committee, usually through its Chair or a designee.through its Chair or a designee.

Detailed updates to Audit Committee as facts are developed.Detailed updates to Audit Committee as facts are developed.

Audit Committee will continuously be pressed by Company Audit Committee will continuously be pressed by Company management and audit firm on conduct of investigation.management and audit firm on conduct of investigation.


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ScopeScope

Audit Committee defines the scope.Audit Committee defines the scope.

Initial focus may be narrow. May increase.Initial focus may be narrow. May increase.

Insure that proposed scope is sufficient to be relied upon Insure that proposed scope is sufficient to be relied upon for audit purposes.for audit purposes.

Audit firm should be consulted in scope definition but Audit firm should be consulted in scope definition but Audit Committee is sole authority.Audit Committee is sole authority.

Update auditor periodically.Update auditor periodically.


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Scope and Work PlanScope and Work Plan

Scope should change if investigation uncovers facts that should be Scope should change if investigation uncovers facts that should be investigated. investigated.

Should be clear trail of how scope was defined and, if changed later, Should be clear trail of how scope was defined and, if changed later, why it was changed. Also document why certain leads not followed.why it was changed. Also document why certain leads not followed.

Investigators must have authority to pursue all evidence of Investigators must have authority to pursue all evidence of wrongdoing, no matter where it may lead, with no artificial wrongdoing, no matter where it may lead, with no artificial limitations. But professional judgment needs to be exercised. limitations. But professional judgment needs to be exercised.

SAB 99 guidance on materiality.SAB 99 guidance on materiality.

Detailed Detailed Work PlanWork Plan should be developed should be developed Audit Committee should approveAudit Committee should approve

Audit firm should approveAudit firm should approve


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Company CooperationCompany Cooperation

Audit Committee must ensure that all Company Audit Committee must ensure that all Company employees, including senior management, are encouraged employees, including senior management, are encouraged to cooperate with investigation.to cooperate with investigation.

Board and senior management directive to employees to:Board and senior management directive to employees to: Cooperate with investigation; Cooperate with investigation; Make themselves available on request; Make themselves available on request; Make available documents; Make available documents; Be truthful and candid.Be truthful and candid.


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Document Preservation and ReviewDocument Preservation and Review

Suspend document retention (destruction) process until scope of Suspend document retention (destruction) process until scope of investigation is defined.investigation is defined.

Once scope is defined, preserve Once scope is defined, preserve forensicallyforensically the the relevant relevant electronic electronic data. Usually need outside help.data. Usually need outside help.

Document review must be broad enough to capture all relevant Document review must be broad enough to capture all relevant documents, but narrow enough to meet realistic scope.documents, but narrow enough to meet realistic scope.

Hard copy documents must also be collected and reviewed.Hard copy documents must also be collected and reviewed.

Document the process for later review by others.Document the process for later review by others.

Ideally should precede the witness interviews.Ideally should precede the witness interviews.


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Witness InterviewsWitness Interviews

Identify key witnesses in work plan, making reasoned Identify key witnesses in work plan, making reasoned decisions on whom to interview, when and where.decisions on whom to interview, when and where.

Witnesses must be advised:Witnesses must be advised: Investigators represent the Audit Committee, not the witness, the Investigators represent the Audit Committee, not the witness, the

Company, or its management.Company, or its management.

Rights under Sarbanes-Oxley.Rights under Sarbanes-Oxley.

Notice that interview is not privileged and that investigators are Notice that interview is not privileged and that investigators are free to disclose information learned to the Audit Committee, the free to disclose information learned to the Audit Committee, the Company, and any regulators.Company, and any regulators.


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Witness InterviewsWitness Interviews

ProcessProcess

All interviews should have more than one person present to All interviews should have more than one person present to conduct the interview.conduct the interview.

If financial reporting or internal controls are implicated, forensic If financial reporting or internal controls are implicated, forensic accountants should be present.accountants should be present.

Company auditor may be present and in some circumstances Company auditor may be present and in some circumstances should be present to help judge credibility. Especially true of should be present to help judge credibility. Especially true of witnesses in representation chain.witnesses in representation chain.

Interviewers should keep detailed notes of interviews.Interviewers should keep detailed notes of interviews.

Notes v. transcripts.Notes v. transcripts.


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Weight of the EvidenceWeight of the Evidence

May find evidence going both ways; goal is to determine May find evidence going both ways; goal is to determine what probably happened based on the credible evidencewhat probably happened based on the credible evidence

Auditors will consider incriminating evidence:Auditors will consider incriminating evidence:

In assessing remedial actionIn assessing remedial action

Willingness to accept representations from particular individualsWillingness to accept representations from particular individuals


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Confidentiality of Ongoing InvestigationConfidentiality of Ongoing Investigation

Institute procedures to insure that executives or Institute procedures to insure that executives or employees potentially involved are not updated as to employees potentially involved are not updated as to investigation progress.investigation progress.

Management should not interfere with investigation or Management should not interfere with investigation or demand to be updated on its progress. Management will demand to be updated on its progress. Management will be updated on the Audit Committee’s schedule.be updated on the Audit Committee’s schedule.

Management should not have any prior substantive Management should not have any prior substantive contact with interviewees or targets.contact with interviewees or targets.


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DeadlinesDeadlines

The investigation should proceed quickly, although The investigation should proceed quickly, although getting it right is more important than speed.getting it right is more important than speed.

But, the investigation should not be compromised by But, the investigation should not be compromised by inordinate management pressure, upcoming deadlines for inordinate management pressure, upcoming deadlines for the filing of a 10-K, or other artificial restraints.the filing of a 10-K, or other artificial restraints.

Most audit firms will not permit the scope, quality, or Most audit firms will not permit the scope, quality, or depth of an investigation to be compromised by depth of an investigation to be compromised by unreasonable deadlines.unreasonable deadlines.


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TransparencyTransparency

Auditor will expect complete access to information.Auditor will expect complete access to information.

Auditor will want to make its own judgment and will Auditor will want to make its own judgment and will review the investigation materials.review the investigation materials.

Failure to provide results may result in scope limitation.Failure to provide results may result in scope limitation.

Sharing with auditor impairs confidentiality of Sharing with auditor impairs confidentiality of investigation because only 15 states, not including Texas, investigation because only 15 states, not including Texas, have auditor—client privilege.have auditor—client privilege.


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Privilege IssuesPrivilege Issues

Interview notes and any report may be protected by Interview notes and any report may be protected by attorney-client privilege and/or work-product privileges.attorney-client privilege and/or work-product privileges.

““Facts” not protected by either privilege.Facts” not protected by either privilege.

SEC will request access to any written report.SEC will request access to any written report. SEC’s position is that disclosure does not waive privilege.SEC’s position is that disclosure does not waive privilege.

Court decisions do not agree that there is no waiver.Court decisions do not agree that there is no waiver.

Best practice is to obtain non-waiver agreement.Best practice is to obtain non-waiver agreement.


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Report ContentsReport Contents

Circumstances leading to investigation.Circumstances leading to investigation.

Investigation’s scope.Investigation’s scope.

Persons interviewed.Persons interviewed.

Sources of documents reviewed.Sources of documents reviewed.

Underlying facts discovered.Underlying facts discovered.

Conclusions on culpability and intent.Conclusions on culpability and intent.

Explanation of accounting adjustments.Explanation of accounting adjustments.

Proposed remedial action.Proposed remedial action.


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Report FormReport Form

Oral or written.Oral or written.

Needs and desires of:Needs and desires of: Audit CommitteeAudit Committee

RegulatorsRegulators

AuditorsAuditors

should be considered.should be considered.

Auditor Auditor will will document conclusions in work papers.document conclusions in work papers.


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Company ResponseCompany Response

The Company will be required to provide representations The Company will be required to provide representations with regard to the investigation and any financial with regard to the investigation and any financial statements affected by its conclusions.statements affected by its conclusions.

Auditors may not accept audit-related representations Auditors may not accept audit-related representations from management when evidence of wrongdoing exists.from management when evidence of wrongdoing exists.


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Public DisclosuresPublic Disclosures

Audit Committee, in consultation with Company, should Audit Committee, in consultation with Company, should consider the extent to which disclosure regarding the consider the extent to which disclosure regarding the investigation should be made.investigation should be made.

Review draft press releases.Review draft press releases.

But disclosure is ultimately the responsibility of the Company, But disclosure is ultimately the responsibility of the Company, not Audit Committee.not Audit Committee.

Company should make available to auditor draft press Company should make available to auditor draft press releases.releases.

Continue to assess the need for disclosure.Continue to assess the need for disclosure.


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Reporting to GovernmentReporting to Government

Audit Committee should consider benefits of cooperation Audit Committee should consider benefits of cooperation and self-reporting if evidence of wrongdoing found.and self-reporting if evidence of wrongdoing found.

Full cooperation is not a guarantee of non-enforcement.Full cooperation is not a guarantee of non-enforcement.

Full and reasoned evaluation should be made Full and reasoned evaluation should be made beforebefore making a decision to self-report.making a decision to self-report.

Consider whether Company auditors should attend Consider whether Company auditors should attend meetings with government.meetings with government.


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Auditor’s ResponseAuditor’s Response

Auditor will assess the reasonableness of scope, findings, Auditor will assess the reasonableness of scope, findings, independence and conclusions of investigation.independence and conclusions of investigation.

Assess the extent to which the investigation can be relied Assess the extent to which the investigation can be relied upon for purposes of issuing audit report.upon for purposes of issuing audit report.

Assess whether the Company has taken “timely and Assess whether the Company has taken “timely and appropriate remedial actions” per appropriate remedial actions” per §10A.§10A.

Assess the extent to which Company personnel have Assess the extent to which Company personnel have cooperated with investigators and been candid and cooperated with investigators and been candid and truthful.truthful.


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ConclusionsConclusions

Objective: get investigation behind you; not make it worse.Objective: get investigation behind you; not make it worse.

Inadequate investigations can:Inadequate investigations can: Lead to adverse regulatory results; Lead to adverse regulatory results; Prevent audited financial statements; Prevent audited financial statements; Increase the appearance of guilt; Increase the appearance of guilt; Result in sanctions against law firm conducting the regulations under Result in sanctions against law firm conducting the regulations under

the SEC Rules of Practice and Standards of Conduct.the SEC Rules of Practice and Standards of Conduct.

A thorough independent investigation:A thorough independent investigation: Safeguards the integrity of the outcome; Safeguards the integrity of the outcome; Serves the interest of a public company, its board, its regulators, its Serves the interest of a public company, its board, its regulators, its

auditors, and its shareholders.auditors, and its shareholders.

internal investigation what to expect

Documents

scope audit committee

audit firm

substance audit committee

audit committees

audit purposes

scope of investigation

independent of company

company management