When and How to Do an Internal Investigation
Employment and labor attorneys offer advice for businesses
on June 30, 2022
A few years ago, when government regulators suspected a global automotive supplier of violating the Clean Air Act, the company quickly responded, “Everything’s fine.”
“They were even going to take a position on the record that would’ve involved the executives saying that essentially under oath,” says Ron DeWaard, an attorney with Varnum in Grand Rapids, Michigan. “We slowed them down and said, ‘You really need an internal investigation, because your environmental compliance is being managed across the organization. So you really need to figure out how this came about and whether it was just a plant-specific issue.’”
DeWaard’s investigation revealed that the violations did, indeed, run rampant in the company, a fact that eventually would have come to light as part of the government probe. Instead of hiding the details, executives shared them with authorities. A vice president was charged and convicted, but the company cleaned up the problem and avoided liability. “If they had not been cooperative,” says DeWaard, “it could’ve been catastrophic for the company—millions and millions of dollars’ worth of fines, not to mention the reputational damage if they’d actually been charged with a crime.”
Never underestimate the importance of a proper internal investigation, whether it’s prompted by an employee complaint or a government inquiry, say the attorneys who routinely conduct them. If, for instance, a supervisor’s behavior is damaging employee morale and productivity, an investigation could get to the bottom of it and pave the way for corrective measures. What’s more, says John Fullerton, an attorney at Epstein Becker & Green in New York City, “If somebody is doing something illegal, I as the business owner want to know about it so I can nip it in the bud and I don’t wind up in litigation.”
Adds Linda Klein, of Baker Donelson in Atlanta, “Under the U.S. Attorney’s Manual, the Department of Justice has indicated that a properly run internal investigation that ferrets out wrongdoing and prevents future wrongdoing can affect and potentially reduce—or eliminate—exposure to criminal charges.”
That said, it has to be handled correctly, says Patricia Brown Holmes, of Riley Safer Holmes & Cancila in Chicago, who has been handling investigations for a variety of industries for two decades. “If an investigation is not handled appropriately, you could end up like Enron.”
‘That’ll Never Happen to Us’
Internal investigations happen more often than people might think, says Joshua Davis, of Goulston & Storrs in Boston. “Over the course of the last 10 to 15 years, the internal investigation has become a relatively common human resources tool in companies of all sizes.”
They can be prompted by a wide range of issues, from executive breach of duty and embezzlement to sexual harassment and bullying. Anonymous hotlines and whistleblowers play an increasing role, and hot-button issues fueled by news headlines are often involved. “What happens in the workplace is reflective of what’s happening in society,” says Fullerton. “When the #MeToo movement was very high-profile, we saw a spike in sexual harassment claims and investigations. The same thing happened in 2020 when the death of George Floyd resulted in a resurgence of the Black Lives Matter movement. That resulted in a noticeable increase in race discrimination reports and resulting investigations.”
Understandably, the mere mention of an “investigation” can conjure up anxiety and dread. What are they going to find? Will it hurt us? Will it trash our reputation? Will an investigator comb every inch of the company in search of some small, bad thing? Not so, says, Jessica Nall, who conducts investigations for tech companies at Baker & McKenzie in San Francisco. “There’s definitely a way to do a surgical internal investigation where you’re really focused on one issue. It’s not a blank check. It’s not a loss of control. It is instead getting control over an issue that’s happened within the company that everybody would like to see fixed and remediated.”
It’s also part and parcel of a healthy business climate, says Holmes. “If you’re not looking at processes and procedures over and over, then you’re missing something—constantly reviewing what you’re doing so you don’t overlook anything. There is always room for improvement.”
Given the frequency of internal investigations, it’s wise to prepare for the inevitable. Set up a foolproof document-management program that can compile emails and text messages quickly and lock down data so it can’t be destroyed. Designate trusted employees in your IT department who can provide that data in a hurry and a human resources staffer who can spring into action as the point person for the investigator.
HR or Lawyer?
So a simmering issue has bubbled to the surface and it’s time to instigate an internal investigation. Do you go with an HR manager or a lawyer?
First, pinpoint what you want to accomplish. Are you trying to understand processes? Looking for ways to do things better? Trying to ferret out wrongdoers? If you’re dealing with a minor employee dispute, HR might be able to handle it. If the issue involves the entire company, potential criminal allegations or the scrutiny of a government agency, or a conflict of interest within your legal or HR department—or they simply don’t have the time—you’re better off hiring an outside investigator.
“Where the wrongdoing is centered on high-level managers, they may be perceived as having the ability to unduly influence the investigation and successfully ‘whitewash’ it,” says Klein. “If an owner or HR manager has an uncomfortable feeling for whatever reason, at least consult with outside counsel before acting. Gut instinct is often right.”
Davis uses a thermometer analogy to illustrate. If the issue doesn’t constitute a “pick-up-the-phone-and-call-your-doctor moment,” it might be successfully handled in-house. If the company is “running a high fever,” you probably need outside guidance. Perhaps most importantly, hiring a lawyer can provide critical protection for the company under attorney-client privilege.
Choose one with expertise in investigating your particular issue. Klein’s firm was once hired to conduct an internal investigation into a corporate client’s immigration practices. “For obvious reasons, having an experienced attorney well-versed in the intricacies of immigration law was vital for our internal investigation,” she says.
Look for someone who can relate to your workers, adds Nall. “It’s really important, especially in the tech industry, because you are going to be talking to and interviewing a whole lot of people that are probably not … the gray-haired, suit-wearing type. So you want to have somebody that can talk the talk and understand culturally where people are coming from so they can get them to open up and admit things that people don’t want to admit.”
Once the investigation has begun, the attorney will review the data and map out a plan, and interview key personnel, generally starting with the person who filed the complaint and ending with the accused. “If you don’t follow the right process in interviewing people, you can tip them off and cause all kinds of damage,” says Nall.
It’s also important to work quickly. “[News of an investigation] spreads like wildfire despite your best efforts,” says DeWaard. “And now your ability to really get to the truth is compromised. One of the largest challenges is making sure that you’re able to not have the company employees get in the way.”
During a whistleblower-triggered investigation of a software firm’s transactions, Nall discovered the company had been cooking the books to meet its financial performance goals. “We were able to quickly get the right documents, quickly get the people interviewed, quickly understand the issue … and really help the company fix a major issue around revenue recognition in quick order,” she notes. “I’ll never forget going in there and trying to get senior executives to admit things that they knew, at the end of the day, were not right. But they had no choice when I showed them the emails, and the only thing they could say was the truth.”
An investigation can take days, weeks or months, depending on the complexity. A final report, either written or oral, will summarize findings and offer recommendations. “It’s kind of a cleanup,” Nall says. “We try to leave it better than we found it in terms of helping with new techniques for compliance and controls so that the company doesn’t have the same problem happen again. Especially if it’s a crime or regulatory issue, the government will look very poorly upon a company that makes the same mistake twice.”
When the investigation wraps up, communicate with the person who raised the concern, as well as the accused, and take disciplinary action or rework company policies. Often, says Davis, “an investigation will resolve the underlying complaint or issue to the point where there’ll be no further process at all.”
Mistakes Are Avoidable
The temptation to bury your head in the sand and forego an internal investigation can be strong. DeWaard recalls a medical device manufacturer who originally hired an inexperienced attorney to represent the company in a federal inquiry but didn’t do an internal investigation. It also failed to lock down its IT data and only sporadically provided information to the government. “The government came to the conclusion that the company was a bad actor,” DeWaard says. “We were hired at that time, came in, did an investigation and were able to cooperate with the government and show that the company was not a bad actor, that the situation was just mishandled early on.”
Once an investigation is underway, managers may find it hard to resist the temptation to intercede. But confronting the alleged wrongdoer can sabotage the process, and retaliating against employees who speak up is illegal. “While they wait for the results of the investigation, the most important point for a high-level executive is not to inappropriately interfere in the investigation or undertake activities that might make things worse—for example, destroying records or obstructing the investigation,” says Klein. “Such activities can jeopardize the integrity and independence of the investigation and may result in cover-up allegations that, in some cases, are more serious than the underlying issues.”
Other mistakes stem from sheer impatience: jumping to conclusions, insisting on immediate answers or pushing the investigator to take shortcuts. “They’re the same mistakes we all make when we’re watching a detective show on television and we think we’ve figured it out and we find out at the end we missed it,” says Davis. “You need to get all the way to the end of it.”
The Silver Lining
Though seemingly treacherous, internal investigations are designed to bring about positive changes such as training programs, streamlined management structures, and policy improvements. They can also show the world that a company is acting in good faith. “Presenting a proactive stance to the public—media, consumers, et cetera—can affect a company’s bottom line and enhance its image as a good corporate citizen,” says Klein. “Perhaps most important is how an effective internal investigation will be viewed by law enforcement and/or government regulators.”
Says Fullerton, “Every time you find out that somebody has been doing something inappropriate and nip it in the bud, it’s a success. A lot of times, their behavior improves and it’s a success because the person who raised the claim has been heard, is satisfied with the outcome, and stays instead of leaving the company.”
Though some business owners fear that such investigations will rack up exorbitant charges, they might save the company money through “cultural improvement and changes that keep the sorts of things that happened there from arising again,” DeWaard says. “The company could be harmed through actions like embezzlement, or the company’s relationships with its customers could be harmed through its employee’s actions.”
It’s a good idea to routinely “look under the hood” and make sure your company is on track. Doing so encourages employees to feel good about where they work, and taking complaints seriously helps you steer clear of bigger employment problems. Having a robust investigative policy in place is often a deterrent itself.
“Why run the risk of finding yourself the subject of that kind of inquiry,” Davis asks, “if you know that might happen?”