Oversight of special investigations

April 2016

On March 17–18, 2016, members of the North American Audit Committee Leadership Network (ACLN) met in New York for their 32nd meeting. In one session, they were joined by Bart Friedman, a senior partner at the law firm of Cahill Gordon & Reindel.  

In conversations both before and during the meeting, Mr. Friedman and ACLN members touched on several aspects of overseeing a special investigation: 

  • The challenging government enforcement environment 
    Heightened prosecutorial attention to corporate conduct has caused audit committee chairs to launch investigations of a number of different issues. In particular, ACLN members called out governmental pursuit of Foreign Corrupt Practices Act (FCPA) violations, scrutiny of financial reporting, and emphasis on individual liability – including for gatekeepers such as auditors and board directors – as reasons for this attention. Government incentives for whistleblowers have made it even more important that companies stay on top of these issues.  

  • Launching an investigation
    Several types of allegations may prompt a board to launch an investigation, including financial irregularities, allegations against senior management or directors, and government enforcement matters. Though allegations that represent an existential threat to the company may require a special committee, the audit committee will typically oversee an investigation by the board. Mr. Friedman argued that more serious cases should prompt the audit committee to hire outside counsel, chosen for its independence from the company, its credibility with the government, its expertise and temperament, and the rapport between the outside counsel and the audit committee.

  • Managing an investigation
    Members were interested in how to keep the scope of an investigation under control. Mr. Friedman recommended comparing outside counsel’s fees with those of the other lawyers involved (such as those hired by management), and he and the members emphasized the importance of ongoing dialogue between the audit committee and counsel. Communication with other board members and senior management is also important, but counsel should be involved in order to preserve privilege. Counsel should also build a relationship with the external auditor, based on transparency and trust, since the auditor is a key participant in this process. Mr. Friedman and members generally agreed that an investigation should only be concluded when every allegation has been thoroughly examined.  

  • Communicating to external stakeholders
    Despite the ACLN members’ reservations, Mr. Friedman argued that self-reporting to the government is generally the safest approach for the audit committee. The government is likely to learn about a serious issue from other sources, and the consequences for audit committee members would then be dire. Transparency with shareholders is also important, and Mr. Friedman reminded the members that disclosures to shareholders are carefully scrutinized by the Securities and Exchange Commission (SEC).