Staying Independent in Fraud Investigations


I would like to think that most companies are committed to doing business honestly. They try to do the right thing, and when a problem is found, they try to correct it quickly.

Even when a scandal is looming, I hope most companies would want to find the truth as fast as possible and take appropriate action.

Even when a company is committed to fixing problems, however, management does not always do it the right way. This is particularly true when it comes to investigating suspicions of wrongdoing. There are many times when such an investigation must be done by an independent party in order for the company to be in the best possible position following the conclusion of the investigation.

Obviously when a company investigates itself, there are questions raised about the authenticity of the results. It’s easy enough for management to “investigate” and declare that all is well. Who is going to believe those results?

However, when an outside, independent party completes the investigation, the results are deemed more reliable. The independent person has no apparent self-interest in giving the company a passing or failing grade, so the results are more likely to reflect reality.

Independent legal counsel
When conducting internal investigations, the need for independent legal counsel is obvious. The attorney-client privilege is fully protected in a way that it might not be if a company is using in-house counsel or their regular outside counsel to investigate.

By separately engaging counsel for a particular investigation, third parties such as government employees have little power when it comes to subpoenas or discovery requests in litigation. Results of internal investigations, whether positive or negative, are work product and well-protected.

Companies often choose to have their outside transaction or litigation counsel perform these investigations. This may work from the standpoint of attorney-client privilege, however, it doesn’t have the same appearance of impartiality that would exist by using specialized outside counsel. The key is in selecting counsel that has no apparent self-interest in producing favorable results in the investigation. Separate outside counsel has no ongoing relationship with the client to influence the results of the investigation.

Independent fraud investigators and forensic accountants
As with counsel, it is advisable to have independent professionals conduct the financial portion of an investigation. While there may be an advantage to having a company’s finance personnel or outside auditors (who already know much about the company’s accounting and finance functions) conduct an investigation, they do not bring independence to the table.

Again, independence is the key to having reliable results in an investigation. Those who are employed by the company or have an ongoing professional relationship may be inclined to give a favorable opinion at the end of an investigation in order to preserve the relationship. This is not the case with an independent, outside professional who is retained for a single engagement.

An added benefit to using an outside fraud investigator or forensic accountant is the experience with fraud examinations and financial investigations. These specialized skills should always be welcome in internal investigations, as they help ensure that proper evidence will be gathered and a thorough investigation will be completed.

Protecting results

In order to protect the results of an internal investigation, all work should be performed at the direction of outside counsel. The company should never directly retain the fraud investigator, private investigator, or other specialized professional. Outside counsel should retain these people so that privilege will apply to their findings.

Although this creates a sometimes bothersome layer to the administrative process, it is necessary. What if the investigator turns up information that is unfavorable to the company, and which could result in civil or criminal prosecution by the government? If those results are protected by attorney-client privilege, the company will have a chance to analyze the situation and develop a game plan without the threat of the government being entitled to see the results of the investigation.

The government is interested in companies self-policing when it comes to regulations like the Foreign Corrupt Practices Act (FCPA), health care fraud, and the like. Companies are expected to monitor their operations for irregularities, and to commission independent investigations when red flags are discovered.

These duties are growing, and companies that can demonstrate that they have been diligently monitoring their operations and conducting investigations that are truly independent may receive more favorable treatment from the government when wrongdoing is discovered.

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