Planning Investigations in the New Normal

The COVID-19 pandemic brings together a perfect storm of factors that will lead to an increase in fraud, regulatory scrutiny and disputes. In response, there will be an increase in internal investigations led by organizations and/or their boards. Boards of public and private companies and other organizations are increasingly being held accountable for their role in internal investigations.

Depending on the nature (misstated financial filings, regulatory matters, executive misconduct, etc.) and the materiality, the board may be leading the charge, running a parallel investigation to that of management or simply monitoring an investigation being handled by management. No matter the construct, boards are most likely to take responsibility for a potential outcome.

Board members are not afraid to ask tough questions, quite the opposite. However, given the pace of many investigations, we often see board members ask the right questions, but too late in the process. The time to make sure the scope is adequate, the team is not only qualified but independent

Investigations generally follow five phases:

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Scoping and planning are key to a successful investigation. This is the time to ask the hard questions, make sure all stakeholders are considered and the right team is assembled to be successful. If you want until the investigation is underway or worse yet, completed, it may be too late to address flaws that can easily be addressed at the beginning.

1. What is the objective?

If you don’t know where you are going, any road will take you there. Investigations are lead-driven; as the understanding of the facts changes, so will the scope. The objective must be understood to inform the decision to make changes in the scope. An investigation with the objective of identifying criminal conduct and providing evidence for criminal prosecution will necessarily be different from one with an objective to understand the root cause of unethical (but not necessarily illegal) behavior.

2. Who are the stakeholders?

Depending on the nature of the conduct being investigated there may be any number of stakeholders and other parties interested in the outcome of the investigation. Obviously, investors, boards and management are stakeholders. However, have you considered whether your customers, vendors, auditors or the public also has a stake in the outcome? Regulators and law enforcement may also have an interest in the final investigation even if it is not obvious when the investigation commences.

3. Does your investigative team have the requisite competence and independence to meet your objectives?

The investigative team usually starts with inhouse or outside legal counsel that will engage other advisors including forensic accountants and forensic technologists. By having legal counsel lead an investigation, you may be able to avail your organization of certain legal privileges. Trained forensic accountants and forensic technologist understand how to properly collect and preserve evidence including maintaining proper chain of custody so that the evidence can be used in legal proceedings that may come at the end of the investigation. You also need to ask, is the investigative team independent in fact and appearance? The credibility of the investigation’s findings often rests with the competence and integrity of the investigation team. Prior relationships between the members of the investigation team and the organization need to be vetted prior to being engaged.

4. Has management been appropriately quarantined from the investigation?

Depending on the nature of the matter investigated and the level of employees allegedly involved, management may need to be quarantined from the investigation. This may be hard for a CEO or his leadership team to understand, especially as an investigation is being initiated. It is important to remember that management’s involvement will also weigh in on the credibility of the investigation’s findings. This is precisely why, for certain sensitive matters, boards should lead the investigation. Likewise, the board must make sure the investigation is given adequate resources and time to conduct the inquiry.

5. Will the end-product include a root cause analysis answering, “why it happened?” not just what happened?

We see greater expectations from regulators and other stakeholders for findings regarding the root cause of the misconduct. Was the misconduct the result of an isolated actor or deeper flaws in the organizations culture?

Conclusion

The initial hours and days of an investigation are key to its success. Securing answers to these questions will help ensure it gets off to a great start. Often there are many other steps to planning an investigation. Continued transparent communication and agility become key as you build out and execute the plan.

For most board members and management teams, a high- profile investigation is a once in a career event. Our DHG Forensics professionals have decades experience conducting investigations and can help you think through all these issues and more. Please consult with your DHG engagement partner or contact the author if we can be of assistance. Also check back for future knowledge share pieces that will cover the other phases of investigations.

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