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Reporting on an Internal Investigation (Part IV of IV)

alstom3The art of internal investigations is the ability to identify risks, adapt to those risks and avoid knee-jerk solutions.  There are lots of nuances to internal investigations issues and the best practitioners in this area are able to identify them and carefully resolve questions.

Since the stakes are high in most internal investigations, companies have to recognize the need for careful deliberation on important issues.

One of those important issues is how to report the result of an internal investigation.  This is an important issue and requires examination of several factors.

The most significant risk is that prosecutors and private litigants can eventually get access to the report and use the report against the company.  That is a real and significant risk, especially as companies face greater risks and challenges to assertions of attorney-client privilege in the internal investigation context.

Whether a report on an internal investigation is written or oral, the report itself should cover several basic issues, including a basic description of the investigation steps that were taken, why certain steps were taken, the documents reviewed, the persons interviewed, and the issues that were examined.

The investigation findings should be explained and the basis for each conclusion, including the evidence that supports such conclusion (and contrary evidence as well), and how the evidence was assessed and resolved.

In addition to the scope of any report, the results of the investigation have to be assessed for a number of purposes.  These include potential criminal, civil and/or regulatory liability; disclosure requirements under federal and state securities laws; reporting and notification requirements to the federal or state government officials, the board of directors, external auditors, and any other significant stakeholders; notification to relevant insurance companies; imposition of discipline to employees or possible termination of contracts with third parties and/or vendors/suppliers; and communications with the public.best

Turning to important internal purposes, investigation findings are important for compliance professionals to review and assess for purposes of remediation, if needed, and improvement of the company’s compliance program.

Considering all of these factors, the decision to prepare and disseminate a written report versus an oral report will turn on a weighing of all of these factors.  It is not an easy call – in many cases, the decision will turn on the seriousness of the violations discovered during the internal investigation.

For example, assuming that a serious violation has been identified and confirmed through the investigation, the company is likely to disclose this matter to federal prosecutors and regulators.  In this situation, a written report is less risky since the company will cooperate and work with the federal prosecutors and regulators to investigate and remediate the problems identified in the internal investigation.

On the other hand, if the company decides not to disclose a specific problem and remediate the problem, the company may choose not to prepare a written report out of concerns that, if the report is leaked or discovered down the road, it could provide a roadmap to the issues identified and remediated.

The analysis, however, gets more complicated when you factor in disclosure to the external auditor who then has a duty to disclose if the external auditor is not persuaded that the company is taking adequate remedial steps to address a specific legal problem.  In most cases, this issue can be appropriately resolved through careful discussions and collaboration with the external auditor but it requires attention and resolution.

bouncingball3Adding to the complications in this situation, is the fact that corporate boards and audit committees will provide an important oversight role and usually have separate counsel to represent them during significant internal investigations.  In this current enforcement environment, corporate boards and audit committees bring an independent and fresh oversight role to the internal investigation and are likely to have a separate view on the issue of whether to prepare a written or oral report.

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