In today's post-Sarbanes-Oxley corporate environment, all companies face heightened scrutiny and increased reporting responsibilities for corporate wrongdoing. However, they also now have the benefit of the new confidential reporting mechanisms to assist in uncovering and investigating potential and actual misconduct.As a result, more companies will be confronted with the need to undertake internal investigations to verify and determine the extent of the wrongdoing. For better or for worse, corporate internal investigations have become a necessary part of doing business - and companies must know how to conduct them.
When an incident such as theft or fraud is known or suspected, general counsel, chief executives and chief financial officers must react quickly and appropriately - taking the right steps and capturing the information needed for reporting or prosecuting the accused. If mishandled, even a relatively insignificant matter can become a much more serious and costly scenario.
An internal investigation can be as simple as a few hours of time for the internal audit department, or so voluminous and complex that it necessitates the hiring of experts, including outside counsel, forensic accountants and computer specialists.
In more complex investigations, issues such as the order in which to interview witnesses, the need for computer system interrogation, and the volume and location of documents will dictate the size and scope of the investigation team.
Make it company policy
We recommend adopting a company policy and specific procedures for internal investigations, so that when issues arise, you can be certain that all appropriate protocols are followed and legal issues are considered. You should develop well-thought-out policies before fraud is suspected, rather than in crisis-mode once red flags have been raised.
In developing your company policy, keep in mind that it is not a best practice to simply question or fire a suspected offender upon first suspicion. It is in the interest of the investigation to make every effort to obtain as much information as you possibly can before challenging or confronting anyone.
Planning your investigation
All investigations have two things in common: the gathering of documents and the interviewing of witnesses. Typically, the company will first determine the list of likely witnesses, and, subsequently, the documents to gather and review.
Yet keep in mind that the lists of witnesses and documents needed are likely to develop and change as the investigation progresses. For example, it is not always possible to determine all of the relevant documents until you have interviewed some of the witnesses. In fact, it is common for an unknowing witness to provide information that, on the surface, seems unimportant or trivial, yet turns out to be pivotal.
Another potentially unexpected yet valuable source of information is the "all-knowing" executive assistant. While executive assistants are not always considered a high priority on the list of witnesses, investigators have often found them to have a wealth of information. Depending on the type of activity and the individuals being investigated, this may be the best place to start the investigation.
During the planning process of an investigation, it is important to continue with "business as usual" and avoid seeming suspicious - and to involve only those necessary on a strict need-to-know basis. However, be certain to keep detailed records of all actions and events from the first hints of suspicion.
Broaden confidential reporting
The confidential reporting mechanism required of publicly held companies due to SOX is a good source of leads about possible fraud. But to increase the chances for uncovering fraud, it can be very useful to open up the confidential reporting mechanism beyond company employees to vendors, customers and others.
Allowing outsiders a confidential vehicle to report potential problems affords a company the opportunity to detect situations that might otherwise go undetected because of collusion or a number of other factors. This could also be considered an effective management control activity for fraud detection.
Protecting privilege
One of the risks faced by companies when conducting an internal investigation is the uncovering of additional items that become discoverable if not handled with consideration for the protection of documents that would otherwise be protected by privilege. This is generally only an issue with respect to investigations that result from a legal proceeding or a subpoena.
Interviewing witnesses
Corporate counsel, outside counsel and human resources each play a crucial role in evaluating the risks and steps to be taken when interviewing and communicating with employees in an investigation. One key factor to remember when interviewing witnesses is the paramount importance of knowing - and respecting - the employee's rights.
In addition, when interviewing witnesses, it is a good idea to obtain a written and signed statement. This assists with future reference, ensuring that the information is understood and agreed upon, and in case the witness is not available at a later time.
Choosing a team leader
Fraud investigations are serious matters, and should be undertaken by someone who is skilled and equipped with the appropriate training and knowledge for the task. It is critical to ensure that documentation and information is kept organized. The individual leading the investigation team must be sure to keep a detailed record that includes the source of all documents and information; notes from all interviews including the time, location, individuals present, etc.; and legal tape recordings or transcripts of interviews.
If the investigation is conducted pursuant to a legal proceeding, there are additional considerations that must be addressed, such as bates stamping, inventorying and the chain of custody of the documents.
Conclusion
With the Sarbanes-Oxley Act's new reporting requirements and whistle-blower provisions, internal investigations are increasing both in their prevalence and their importance. Many factors need to be considered before beginning any internal investigation - such as the size and scope of the project, the available resources, and the privilege of confidential information.
But a well-planned and well-executed internal investigation is an invaluable tool for detecting and preventing fraudulent activity. Done right, it can minimize the potential damage of financial losses and public scandal.
Pamela Woldow, Esq., is the practice leader of litigation support and forensic accounting services at Smart and Associates LLP, where Michelle Brooks, CFE, CPA, focuses on forensic accounting and litigation support.
