When allegations of corporate misconduct surface, an effective internal investigation is essential to uncovering facts and formulating an appropriate response. But how do you maintain independence when the problem at hand involves a senior executive and external auditors are breathing down your neck?
First, it's important to avoid any one-size-fits-all approach. “No two investigations are alike,” says Greg Esslinger, a senior managing director in the global risk and investigations practice of FTI Consulting. “You really have to go through each one as a unique process.”
As a matter comes to light, an early challenge—and one of the most important—is deciding whether it warrants an investigation and, if so, how it should be managed. “One challenge companies often face is identifying the right internal champions with respect to whom should be part of the investigative team and what role he or she should play,” says Esslinger.
That process can be easier said than done, “particularly because you often don't know enough at the beginning to reach a rock solid conclusion,” says Julia Guttman, a partner at the law firm Baker Botts.
Once an investigative team is in place, the next step is to map out where the investigation may be heading, says Andrew Gaillard, assistant general counsel for U.S. compliance investigations at Pfizer. Before conducting any interviews, strategize which individuals need to be informed of the investigation, when they should be informed, and what level of detail they need to know, he says.
For example, if the investigation involves a whistleblower, you may want to have HR involved to handle the employee, advises Esslinger. In other cases, you may want someone from the IT department with appropriate levels of access to work with forensic investigators as they search for hard-to-find data.
Situations that involve senior executives will typically end up being significant events for the company, from both a legal and financial perspective. One way to establish independence early on is to have the investigative team engage with the board or audit committee as opposed to senior counsel, says Esslinger. “Absent that, it's quite difficult to maintain independence.”
In some situations, an internal investigation can maintain independence if the general counsel doesn't report to the senior executive. “It really does depend on the dynamics within the company,” says Guttman.
One of the first issues discussed at the outset of every interview should be the “need for, and importance of, confidentiality,” Gaillard says.
A daunting challenge compliance groups often face during an internal investigation, is treading the line between being respectful and sensitive to colleagues targeted by the investigation and “balancing that with doing a thorough and careful job investigating concerns and addressing them when we find that they're substantiated, he says. “We tend to be very straightforward with the people that we're interviewing or investigating about what it is we're doing and what we hope to achieve.”
A dilemma that can arise during an internal investigation is how to balance the needs of the business with the requirements of the investigation, Gaillard says. Consider, for example, a business leader informed that someone on his senior management team is the focus of an investigation. If the company needs to close a plant and that individual under investigation is the go-to person, what do you do?
“One challenge that companies often face is identifying the right internal champions with respect to who should be part of the investigative team and what role they should play.”
—Greg Esslinger,
Senior Managing Director,
FTI Consulting
The way that Pfizer has handled similar situations in the past, Gaillard says, is to engage with the HR leader designated to support the group within which that individual works. That point person is going to be most familiar with the individual's relationships with others in the organization.
“Even if we don't want to provide a lot of detail for privileged reasons, there is almost always a way to involve [HR] in at least hypothetical discussions about a group or person, where they oftentimes can give really helpful counsel, mediating between the business needs and the investigative needs,” says Gaillard.
Working With Auditors
Another tricky situation is how to work with—or fend off—external auditors demanding to see behind the curtain of internal investigations, when findings could affect financial statements, or there may be weaknesses in internal controls.
At the heart of the matter lies the inherent conflict between the attorneys performing an internal investigation on behalf of the audit committee and the external auditor who needs to tackle their own obligations. “External auditors have their own independent role that they need to fulfill. You can't just tell them, ‘You can't do this,'” says Guttman.
Difficulties arise when the attorneys have findings that they want to keep privileged, raising the issue of how much is enough to share with outside auditors. “You need to think about what you can communicate to them that is honest and that gives them enough assurance without waiving privilege,” says Guttman.
Esslinger recommends seeking the help of competent counsel that is used to dealing with external auditors and walking the line between keeping them informed and not compromising privileged information. “There is always the possibility that the auditors will shadow your investigation,” he says, “so keeping the line of communication open to better understand their concerns and respond to them quickly is important.”
Let them know you're sensitive to their issues—that part of your analysis is going to include a materiality analysis, Esslinger adds. “Help them recognize that you're there in the spirit of cooperation, and generally be as transparent as you can be in the bounds of privilege to make sure they feel updated on the matter.”
Disciplinary Actions
Determining the appropriate disciplinary action against a rogue employee can also be tricky. Do you give the employee a verbal warning, additional training, or both? Is the misconduct so serious that it warrants termination? Where do you draw that line?
At Pfizer, once all the appropriate steps are taken to establish a clear overview of the matter, “we make recommendations to the business about ranges, but it is ultimately the business's decision about what discipline to impose,” says Gaillard. “Usually, there is a pretty good meeting of the minds.”
HALLMARKS OF SUCCESSFUL INVESTIGATIONS
Below is a list of elements that make for a successful internal investigation.
Engage with board or the audit committee early on in the investigation;
Identify who will manage the investigation (legal; compliance, human resources; internal audit; or an outside consultant);
Map out with the investigative team where the investigation may be heading;
Determine whether to retain outside counsel;
Strategize in advance which individuals will need to be informed of the investigation and when they need to be informed;
Identify those business units that may be required to support the investigation (HR, finance, IT, business leaders, etc...);
Initiate a document review and document hold process;
Identify the individuals to be interviewed;
Explain to interviewee the purpose of the interview and stress the importance of confidentiality;
If working with external auditors, consider how to communicate to them as much facts as possible without waiving privilege;
Prepare a final report and present to relevant committee or individuals;
Determine appropriate disciplinary actions against employees found guilty of wrongdoing;
Ensure the punishment sends a strong message to other employees in the company to deter future misconduct.
—Compliance Week.
The business leaders generally are not part of the process until a final decision must be made. “They appreciate getting a heads-up, knowing there is a potential issue that we're looking into,” says Gaillard. “In my experience, they are more than happy to let us figure out what the facts are before they need to be pulled in to figure out the right outcome.”
Esslinger says one factor to consider when determining the appropriate disciplinary action is that individual's level of seniority and experience within the company. One would expect a senior officer to have a much better understanding of the consequences of their misconduct versus a young, new, or inexperienced employee who may not fully grasp the seriousness of a situation, he says.
Determining the appropriate discipline for an employee may also depend on what the potential damage is for the company—no matter whether it's financial or reputational, says Esslinger.
You want to ensure that the punishment sends a strong enough message to other employees as to what serious implications they will face if they engage in similar misconduct, he says. “The company is always better taking a little bit of a harder line than a softer line if they do want to have that deterrent effect.”
The bottom line, according to Esslinger is that the more open, honest, and transparent compliance and legal teams can be when it comes to working with senior leaders and external auditors, the smoother and faster an internal investigation can reach a conclusion.
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