BoardroomDirect® Update on the current board issues: July 2015

July 2015
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BoardroomDirect® Update on the current board issues: July 2015

At a glance

Corporate investigations are on the rise, and the expectation is for these fact-finding exercises to be appropriately and objectively governed. Often, this responsibility falls to independent members of the board of directors. More likely than not, audit committee members will be asked to oversee an investigation at some point. For most, it is not a matter of if, but when.

Issue in focus

When trouble comes knocking: Dealing with investigations

Corporate investigations are on the rise, and the expectation is for these fact-finding exercises to be appropriately and objectively governed. Often, this responsibility falls to independent members of the board of directors. More likely than not, audit committee members will be asked to oversee an investigation at some point. For most, it is not a matter of if, but when.

Issues triggering an investigation are broad and can range from claims of 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. And the heightened focus on bribery and corruption by regulators around the globe has triggered many inquiries regarding these issues.

“Investigations are often directed to the audit committee since they usually play a key role in overseeing the company’s compliance activities, including the allegations submitted through the whistleblower hotline,” said Don Keller, partner in PwC’s Center for Board Governance. He added that at many companies, the audit committee is often charged with overseeing IT, so any issues that fall into this domain are often the responsibility of the audit committee to investigate as well.

With investigations becoming more common and making newspaper headlines more frequently, the key considerations below are designed to help board and audit committee members prepare for, execute, and respond after an investigation.

Adequate preparation can make a big difference

Preparation in advance of any wrongdoing surfacing is important. In this regard, directors will want to evaluate whether the company has established appropriate procedures for capturing and communicating allegations. Companies will want to have a process in place to provide directors with periodic and prompt communications regarding significant allegations from the company’s hotline and other sources, including lawsuits, inquiries from regulators, complaints to managers, and findings from internal audits.

Before an allegation event arises, companies will want to consider the need to establish relationships with regulators, as well as advisors like external legal counsel and public relations firms. For example, establishing a contact with the FBI may be useful when it comes to reporting potential cybercrime. 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.

It is also critical that when external legal counsel becomes involved, they satisfy stakeholder expectations by having the credibility and appropriate skills, experience, and reputation to handle the type of issue alleged. On the communications front, it may be useful to establish internal communication protocols, similar to those considered in any other crisis management planning. Internal communication guidance provides protocols for discussions with external parties, the format of the communications, and the identification of the company spokesperson.

Making decisions when an allegation surfaces

When an allegation is made, 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.” The right investigation team also needs to be selected. 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.

Performing an investigation

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. However documented, the investigation findings will be scrutinized and ultimately used by stakeholders, including management, external auditors, and regulators.

Responding – once the dust settles

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 key considerations dealing with investigations, refer to the Audit Committee Excellence Series: Achieving excellence: Dealing with investigations.]