A company’s need to investigate potential wrongdoing stems from the duty of management to exercise due care in managing the company. Management must act in a manner designed to inform itself of material facts about material acts of the company, to oversee the conduct of employees, and to take such steps, including the retention of outside counsel, to increase the possibility that a court would find that the company exercised its duty of care.
Typically, a company conducts an internal investigation when:
- The company discovers prior incorrect financial statements and wishes to correct errors and re-issue corrected statements.
- The company discovers misconduct in executive or employee ranks and wishes to learn the scope of the problem, take corrective action and discipline wrongdoers.
- The company is served with a government inquiry and seeks to learn the scope of potential wrongdoing.
- The company is provided with notice of a legal claim and seeks to find out the relevant facts so that it can take steps to defend itself.
- The company discovers that it has been the victim of theft or fraud by outsiders, perhaps aided and abetted by internal employees.
- The company is informed by its Auditor that it may have committed an illegal act triggering the need for an investigation.
- The company is informed by its legal counsel of a material violation of securities law, breach of fiduciary duty or other violation by the company or its employees.
Before proceeding with the investigation, the company typically determines the appropriate scope of the inquiry by identifying the problem. It factors into its determination of how to conduct the investigation, and whether to employee outside counsel, the event or notice that precipitated the need for the investigation, the purpose of the investigation, the extent to which employees of the company will need separate counsel, and the extent to which the findings and work product of the investigation may be discoverable.
Once these issues have been analyzed, then the company’s board will approve a written resolution that sets out the nature and scope of the investigation. The retention of outside special counsel, if necessary, will be confirmed in writing by the board, with an appropriate retention letter to counsel stating the scope of the inquiry and making clear that counsel is to advise the company of its legal rights, obligations and potential liability. All communications between the company and investigating counsel are typically treated, and marked, as confidential and attorney-client communications.
Developing an accurate factual record is of primary importance and will usually be accomplished through witness interviews and document review. Relevant documents are identified early on. Inside counsel or a designated management person can be particularly helpful in coordinating the process of gathering and preserving documents. Direction is given to relevant employees that no documents, including electronic documents and attachments, may be destroyed without explicit approval of counsel. Sometimes, technical experts are necessary to search for and preserve electronic documents.