When trouble comes knocking: Dealing with investigations

There’s no doubt about it, corporate investigations are on the rise, and for most companies, it’s not a matter of if, but when.  The rise in these investigations, places increased responsibility on the board.  Often this responsibility falls to independent members of the board, with audit committee members taking the lead in the investigative process.

Issues triggering an investigation can range from financial reporting fraud, conflicts of interest, harassment and violations of laws and regulations, to retaliation against whistleblowers. In addition, the increased prevalence of cyber-attacks against corporations in recent years may trigger the need for investigations into the nature, timing and extent of the breach.

In our most recent issue of PwC’s Audit Committee Excellence Series we addresses the rise of corporate investigations and how boards and audit committee members can prepare for, execute and respond after an investigation.

Before an allegation event arises, companies should consider the need to establish relationships with regulators as well as advisors like external legal counsel and public relations firms. For example, creating a contact with the FBI may be useful when it comes to potential cybercrime concerns. In the case of external legal counsel, it may be necessary to keep them “on the shelf” and free of any economic relationship with the company. If external legal counsel is necessary, a truly independent firm can refute any suggestions that the investigation was inadequate because of conflicted roles. On the communications front, it may be useful to establish internal communication protocols, similar to those considered in any other crisis management planning.

 When an allegation surfaces, the need to conduct an investigation is a decision that should be made as soon as possible. There are no prescribed procedures to making this call. Each situation is unique and specific to a company’s facts and circumstance but, in many cases, directors must “weigh in.” Another consideration is whether the investigation should be conducted using internal resources or independent third-parties. If an allegation could have a material effect on the company or if it implicates senior management, an external investigation team should be strongly considered. A decision also has to be made on who should oversee the investigation–the full board, audit committee, or a “special committee” of the board. Special oversight committees are prudent in cases where there are credible allegations of serious corporate wrongdoing.

Regular communications between the investigation team and the committee overseeing the investigation regarding findings and previously unidentified issues are imperative. The oversight committee will want to continue to provide their perspectives on whether the planned scope of the investigation is appropriate. Documenting and communicating the investigation findings is a subject of much debate. Some investigators prepare detailed written reports while others document their work in bullet-point outline format in a slide deck. Still others would rather communicate their findings orally. The committee will want to carefully consider the pros and cons of the various reporting formats. There is no one correct answer, but it is critical that these options are considered as early in the process as possible.

After an investigation is complete, the important task of responding to the information uncovered and recommending appropriate remedial action falls to the investigation oversight committee, with the help of advisors. The right decisions are critical, especially when they involve members of senior management. The committee will want to take appropriate disciplinary actions post-investigation, ensuring they establish the right “tone at the top” and corporate culture.

It is important to be mindful that dealing with an investigation can take a tremendous amount of management’s time and energy. Many investigations take unexpected turns along the way as findings come to light. It can take months or even years for a company to identify the full extent of an issue as they often relate to an extended period. Directors need to consider that it can be easy for management to lose the balance between focusing on the investigation and keeping the business on track. They will want to monitor the investigation’s process and ensure management stays focused on running the business.

For additional insights, refer to PwC’s Audit Committee Excellence Series: Achieving excellence: Dealing with Investigations.