When to conduct an internal investigation

In Part 1 of our Canadian series Focus on Investigations, we explore the purpose of internal investigations, the type of cases that could benefit from them, and the potential risks and rewards involved in conducting them.

Why conduct an investigation?

Organizations conduct investigations for many reasons. For instance, an internal investigation may assist a company with gathering facts, evaluating risks, and identifying appropriate courses of action when facing a triggering event, such as a complaint or allegation of wrongdoing. When companies (or their personnel) face scrutiny, an effective corporate investigation can provide the information needed for the company to make informed decisions on how to proceed in the face of allegations, and to develop safeguards against future violations. Typically, companies conduct internal investigations to achieve one or more of the following goals:

• To conduct an investigation that is mandated by law (such as mandatory investigations of fatalities in the workplace);
• To consider allegations or concerns of improper or unlawful conduct (such as fraud, bribery, corruption, money laundering, serious conflicts of interest, breaches of laws, including criminal laws, competition laws, trade and export control laws, etc.);
• To assess the company’s potential exposure ahead of investigations by regulators or law enforcement;
• To manage potential liabilities, including civil claims (such as shareholder actions, class actions, claims for wrongful termination of employees, etc.) or serious reputational risk;
• To improve the company’s compliance practices by identifying, understanding, and remediating misconduct; and
• To establish a culture of transparency, compliance, and responsibility within the organization.

However, not every whistleblower complaint or concern warrants a full internal investigation. For instance, some complaints may be objectively dismissed as frivolous. Others may properly be addressed through management, such as disagreements over whether a certain vendor is the best choice. When deciding whether to conduct an internal investigation, organizations should consider factors such as the seriousness of the allegations, the individuals involved, and whether the facts can give rise to a reasonable risk of harm. A carefully drafted Code of Conduct or investigations policy should also help an organization assess which matters require a full investigation and which matters do not.

When should a company conduct an investigation?

Often, it is helpful for the organization to consider whether the following factors apply in considering whether an investigation would be appropriate:

• Does a statute or company policy mandate an investigation into the alleged misconduct?
• Has an audit (either independent or internal) identified a serious issue of potential misconduct?
• Is senior management or any board members involved in the alleged misconduct?

• Do the allegations involve ongoing violations or a pattern of misconduct?
• Is there or is there anticipated to be a parallel government or regulatory investigation? If so, is credit for cooperation available to the company, if they self-report the alleged misconduct?
• Does the alleged misconduct have a serious impact upon the company, its employees, or others?

Cases that have the potential to give rise to serious legal, financial or reputational harm often warrant an investigation. Where the allegations of corporate or executive misconduct may result in criminal prosecution, large civil claim awards, substantial losses to the organization, or negative publicity, a timely, well-designed and effective internal investigation is critical.

What are the pros and cons of conducting an investigation?

If handled properly, a prompt investigation can have many benefits. For instance, conducting an internal investigation can demonstrate the company’s commitment to compliance, and send a positive message to its employees, the relevant officials, and the public. A timely investigation may also prevent further, incidental harm to the corporation, and allow the company to get ahead of any separate investigations by gathering information, preparing responses, and improving its practices.

Where beneficial, companies may consider self-reporting a potential violation to the relevant regulatory bodies in order to secure a lesser penalty or bolster the company’s reputation. Under Canada’s regime for remediation agreements, the case authorities have held that self-reporting is an important factor in the Court’s consideration of a remediation agreement. Further, for offences under the Competition Act, the Competition Bureau offers an immunity and leniency program in applicable instances of self-reports. In the United States of America, the Securities and Exchange Commission and the Department of Justice (DOJ) will consider whether a corporation voluntarily discloses the results of an internal investigation, and may award cooperation credits (in the form of reduced damages and penalties) to companies that voluntarily disclose wrongdoing and cooperate in an ongoing investigation (see DOJ’s “Guidelines for Taking Disclosure, Cooperation, and Remediation into Account in False Claim Act Matters”).

In addition, the conclusions drawn from an internal investigation may ultimately support the position that no wrongdoing has occurred, or provide a more accurate estimate of any damages suffered as a result of the alleged misconduct, which could lead to the early resolution of disputes.

While conducting internal investigations help achieve important goals, organizations should give thought to their downsides. Investigations are costly, time-consuming, and stressful for organizations and their employees. For example, most investigations involve extensive data preservation, collection and review, which are often quite costly and involve unique issues and challenges, which we will discuss later in this series. Further, witness interviews are often stressful and result in lower morale for the employees involved. Sometimes, an internal business discussion or decision is a better tool than a fulsome investigation.

Once an organization has elected to initiate an investigation, the key first step is establishing a comprehensive investigation plan. In the next part in our series, we will consider the key elements of a strong investigation plan and how to use that plan to support your internal investigation.