Internal Investigations: Making Matters Better or Worse?

Internal investigations appear to be the flavor of the month. It’s become increasingly difficult to pick up a news paper without reading that a company is conducting an internal ingestion regarding a possible impropriety. The SEC and the justice department as well as other regulators encourage these investigations.  No doubt this is good policy from the prospective of the government. Internal investigations can help detect improper conduct and practices.  They can also serve as the predicate for the adoption of procedures which can prevent a reoccurrence of the underlying conduct.But are internal investigations always a good thing? Or can there be to much of a good thing? Perhaps. To begin with, an internal investigation has to be independent if it is to have any credibility with the government, regulators or the courts. Independence means outside counsel that does not regularly work for the company. To often in the rush to conduct and inquiry the counsel retained is not independent. Rather, the counsel selected is, if not the regular outside counsel of the company, a firm that periodically does work for it. No doubt the attorneys at such a firm can conduct an investigation and they clearly know much more about the company than new counsel. But it will not be viewed as independent by skeptical government attorneys. Regardless of how good the work is, any outsider reviewing the inquiry will have to wonder if the relationship between the parties has impacted the findings, scope or conclusions. Under these circumstances it can be difficult to convince those outside the company that investigation results which exonerate the company and/or key employees are correct. If the report lacks independence the task is much more difficult and perhaps impossible. More importantly, the lack of independence may suggest that the company has something to hide.

A second problem with internal investigations can be the work. An investigation which is not complete can be worse than no investigation at all. An inquiry which fails to fully assess the facts, which was improperly limited in scope or which reaches seemingly unsupported conclusions favoring the company and/or its employees can be read by outsiders as a white wash. If the inquiry is viewed as a white wash it can suggest that the company is covering something up. Whether in fact this is true, under these circumstances the investigation which was suppose to help solve a problem has just made things worse. Now government or other investigators will have to determine the true nature of the original problem, the reasons for the incomplete report and whether there has been obstruction of justice — the difficult situation which spawned the investigation has just become much much worse.

The bottom line here is that an internal investigation can be a very useful tool. When conducted by independent counsel and properly done it can help solve a potentially difficult problem. If not properly configured and conducted, the company may well have compounded its difficulties rather moved toward a solution.