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How and When to Conduct an Internal Company Investigation

By Sonjui L. Kumar and Fareed Kasani Email By Sonjui L. Kumar and Fareed Kasani
July 2013
How and When to Conduct an Internal Company Investigation

There are many circumstances that may arise during a company’s life cycle that require management to conduct an internal investigation. It is critical that management recognize the situations that may need additional inquiry and be prepared to conduct such an inquiry. Some common reasons to conduct an investigation include reports of unethical behavior by company personnel or contractors, suspected violations of federal or state regulations, or complaints of employee misconduct ranging from theft to sexual harassment.

An internal investigation allows a company to gather information before it is destroyed, lost, or for-gotten, so that the company can fix the problem and be prepared to respond to any fallout that may occur from the event.

If the information is already in the public domain because of a media report or a call from a regulatory agency, then the company will need to respond as quickly as possible. However, if the situation is a result of an employee complaint or management suspicion, then the matter can be handled more deliberately and over a longer period of time.

The main goal of an internal investigation should be to uncover the truth about conduct within an organization, but investigations can serve multiple purposes in times of crisis. An investigation can be used to stop continuing violations, but they can also help a company prepare for a potential lawsuit or to convince a government agency to stop its own investigation. Additionally, internal inquiries are useful to let the company’s stakeholders and third parties (i.e. media, bankers, investors, vendors) know that the company is proactively taking actions to resolve a problem situation.

Before starting an investigation, management may send a notice to all employees and contractors that no company documents or information should be destroyed that relate to the matter being investigated, so that routine procedures like email deletions are put on hold. The company will also want to identify exactly what needs to be investigated and towards what end result. This is important to make sure that management is not looking at an issue too narrowly, but also to avoid a situation of conducting an unnecessarily broad inquiry that does not address the problem at hand.

Investigations can be expensive, so at the outset, the company should also consider the cost involved to make sure that the benefit of the investigation is not disproportionate to the money and resources that are being spent.

The next step is for management is to put together the team that will conduct the actual investigation. The credibility of the investigation will depend on these people, and most companies usually bring in independent third parties with stature and expertise to work with the company’s inside team. The people selected should not be connected to the matters in any way and should be willing and known for their honesty and integrity. The entire investigation may be compromised if the company selects a team that is seen as more willing to protect the company rather than uncover the problems that exist.

Companies should avoid using their regular attorneys, accountants, or consultants who may be more concerned with their own past actions or because their prior engagement with the company has biased their perspective.

What is investigated will of course vary depending on the nature of the problem, but investigations often involve a thorough review of company documents and communications, interviews with company personnel, contractors, and vendors, and combing through data on company networks and files. There are many established procedures regarding confidentiality, notices to witnesses, and other documentation that an experienced investigator will be aware of and implement in a properly conducted investigation.

After an investigation is complete, the company will need to make a decision on what should be disclosed and when. Historically, most companies that conduct an investigation do so with the intent to disclose the full results. Many companies have been able to successfully navigate major problems by being forthright and offering full disclosure of what they have discovered through their internal investigations.

[Business Insights is hosted by the Law Firm of Kumar, Prabhu, Patel & Banerjee, LLC. Sonjui L. Kumar is a corporate, transactional attorney and a founding partner of KPPB Law. She primarily focuses on serving as general counsel to privately held companies assisting them with all legal matters, including corporate governance, contracts, shareholder matters, mergers, and acquisitions.

Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.]

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