Guidance for Investigations – Workplace, Business, Board, Audit Committee and Special Committee

By David Tate, Esq., California (and California inactive CPA)

The following is some guidance for business-related investigations. We are seeing ongoing news about situations where investigations either should be considered or are required – including situations in which investigations were conducted, or have been starting or are in progress, or have not occurred, or did not occur, and also situations where alleged possible unlawful activity occurred or might have occurred but was not reported (although in some such situations knowledge of possible unlawful activity might have been known or perhaps should have been known). These issues don’t simply reflect on the accuser and the accused, but reflect on the business, nonprofit, or governmental entity at issue, and, variously depending on the situation, elected representatives, executive officers, boards of directors and the board committees including the audit committee, general counsel, compliance and ethics professionals, HR, employees, perhaps internal audit and even the external auditor, etc., and throughout the entire organization or entity.

In the workplace setting, for example, an employer has a duty to take reasonable steps to prevent harassment, discrimination, and unlawful employment practices, and to correct inappropriate workplace behavior. See, e.g., California Gov. Code §12940(k); and 29 CFR 1604.11(d). An employer can be liable for the failure to investigate, at least if there was underlying unlawful activity. And a failure to investigate can be considered ratification of unlawful activity. In appropriate circumstances on a claim of wrongful termination, the question can become whether the employer acted appropriately and in good faith after conducting a reasonable investigation and based on a reasonable belief in that investigation – in other words, the reasonableness of the employer’s investigation can become the standard by which the employer is judged for alleged wrongful termination liability purposes.

At the board level, for example, audit committees and special committees can be required to conduct and to oversee investigations in a host of situations such as alleged executive officer wrongdoing; accounting error or impropriety, fraud and foreign corrupt practice allegations; transactions affecting corporate control; affiliate arrangements; liability and derivative claims and litigation; alleged shareholder insider trading; or alleged self-dealing.

The following are some of the issues and steps to consider or follow when determining whether the investigation of a serious situation or allegation of misconduct was reasonable, and whether a reasonable belief in the outcome of the investigation and its process is warranted:

  • Take the complaint of wrongdoing seriously;
  • Maintain confidentiality of the situation to the extent reasonably possible;
  • Conduct a timely investigation promptly after receiving the complaint of wrongdoing or becoming aware of the possible situation;
  • Decide and appoint an appropriate sufficiently independent and qualified person or committee to oversee the investigation, and for decision-making;
  • Consider whether the investigator will be someone in-house or from outside the entity, and how the investigator will be retained, such as through legal counsel;
  • Have the investigation performed by an investigator who is competent and knowledgeable about the relevant subject matter and issues (including for example, as necessary, claims, defenses, applicable law, burdens of proof, presumptions, gathering evidence and the showing required, etc.), and also how to conduct (and evaluate) investigations, investigation techniques, evidence (including, e.g., credibility, admissibility, whether the evidence or possible evidence is “A” or “B” or “C, ” examination, confirmation or support, cross-examination, rebuttal or debunking, and impeachment), writing reports and opinions, and oral communication and witness testimony experience and abilities. Also note issues that might be present if the investigation is performed by an attorney for whom attorney client or work product privileges might be claimed. In short, work these issues out before the investigator is selected;
  • Consider qualified legal counsel and possible additional specialty assistance needed (such as CPA or forensic accountant experts hired through counsel or possibly through the investigator); consider the issue of independence depending on the capacity in which the person, firm or entity is providing services; and also carefully consider any possible appearance of inappropriate conflict or bias, including as viewed by courts, legal authorities, third party stakeholders, and other people in general.
  • Follow appropriate complaint investigation procedures;
  • Listen to and treat the difference sides fairly and equally;
  • Obtain, evaluate and understand the claims that are being made and possible defenses – including, e.g., claims based on a statute or section of law, a regulation, or a rule, and also claims based on some other standard such as any applicable policy, handbook, code of conduct, contract, collective bargaining agreement, etc. that had been enacted or adopted;
  • Provide the accuser with ample opportunity to offer evidence of his or her claims including what occurred or not, documents that might be relevant, and the names of and information about witnesses who he or she believes can provide relevant comments about the alleged occurrence(s);
  • Give the alleged wrongdoer fair notice of the claims being made;
  • Provide the alleged wrongdoer with ample opportunity to offer evidence in his or her defense, including what occurred or not, documents that might be relevant, and the names of and information about witnesses who he or she believes can provide relevant comments about the alleged occurrence(s);
  • When appropriate, provide and communicate an appropriate means whereby third parties can provide information that is relevant to the issues and the investigation;
  • Have the investigator conduct a thorough investigation, under the circumstances (note that in some circumstances courts have held that the investigation need not necessarily be perfect, but it should be sufficient, reasonable and thorough under the exigencies and circumstances at hand without the benefit of full discovery or a trial);
  • Have the investigator prepare a well-reasoned report and conclusions, supported by and based on objective evidence;
  • Have the investigator report to the decision-making person or committee;
  • Have the decision-maker or committee prudently and appropriately evaluate the claims, defenses and investigation; and
  • Implement progressive discipline if appropriate?

Of course, each situation is different, and for some of the above points the courts and regulatory agencies have provided additional guidance.

Best to you,

David Tate, Esq., California (and California inactive CPA) – blogs: audit committees, D&O, governance, compliance, investigations, responsibilities and rights, liability, and risk management http://auditcommitteeupdate.com – trust, estate, and elder and dependent audit abuse litigation http://californiaestatetrust.com – please also connect with me on Linkedin and Twitter.

Disclaimer. This post is not a solicitation for legal or other services inside or outside of California, and also does not provide legal or other professional advice to you or to anyone else, or about a specific situation – remember that laws are always changing – and also remember and be aware that you need to consult with an appropriate lawyer or other professional about your situation. This post also is not intended to and does not apply to any particular situation or person, nor does it provide and is not intended to provide any opinion or any other comments that in any manner state, suggest or imply that anyone or any entity has done anything unlawful, wrong or wrongful – instead, each situation must be fully evaluated with all of the evidence, whereas this post only includes summary comments about information that may or may not be accurate and that most likely will change over time.