Update of Proposed legislation under the Income Tax Act (Canada) Regarding Reasonable Expectation of Profit
Press Release Update on Budget 2006 Tax Relief Proposals

"The Anatomy of a Corporate Scandal"

I recently attended a seminar entitled “The Anatomy of the Corporate Deal” at the National Bar Association's Convention and Exhibits in Detroit, Michigan.  The speakers on the panel for this seminar were Tamika Langley Tremaglio, Managing Director of Huron Consulting Group, Washington D.C.; Marc Sherman, Managing Director, Huron Consulting Group, Washington D.C.; and, Amy J. Conway-Hatcher, Partner in litigation practice at Morgan Lewis. 

The objective of the seminar was to explore the various types of corporate scandals and common investigation triggers and provide suggested approaches for damage control.  Tax fraud or unacceptable accounting and tax reconciliation practices were identified as major risks that could place a company at the forefront of a scandal.  This article will provide proposed responses strategies for handling this type of scandal. 

An investigation can be triggered by a number of things such as a civil lawsuit, a newspaper article, a whistleblower or at the instigation of an auditor.  Any allegations that challenge management integrity are material and should be investigated.  The level of detail of the investigation will depend on the level of management, the nature of the allegations and potential impact on the company.  Where information about wrongdoing is obtained from a “whistleblower”, this individual is expected to co-operate with future investigations into the scandal.  It is important to let this individual know that as general counsel, you represent the interest of the company and not the individual’s interests.  The individual has the right to obtain their own counsel to represent their interests.  Sometimes the first warning of trouble is the result of a FBI investigation when an agent contacts you to ask a few questions.  It is important to have a policy that provides guidance on how to respond to the Federal government inquiries.  It may be tempting to engage in a casual conversation with the agent, however, the panel advised that the employee or director should respond by stating that he or she would like to answer the questions but must speak to general counsel first.

Regardless of what triggers the investigation, a company should have a plan in place to assist with reducing the potential damage that may be caused.  The panel recommended having at least three people to contact during a crisis.  One panellist noted that the company’s auditors should only be contacted first if they are in the process of preparing financial reports to avoid misrepresentations in the report.  Otherwise, since auditors are likely to become more protective of their interests when they become aware that the company is conducting an internal investigation it is better to call someone else who will help determine the gravity of the situation and collect more information before reporting the issue to the company’s auditor.

When dealing with the audit committee, the Sarbanes Oxley Act (“S.O.X”) requires that a financial expert should be on the committee especially when the scandal involves financial issues.  Another thing to be aware of is the composition of any special committees that are formed to protect the interests of board members from allegations of wrongdoing.  Ensure that the board members who are the subjects of an investigation are not responsible for establishing this special committee. 

The panel also advised that when composing a response team to assist with the investigation, internal consultants should not be used to review work that they did previously.  It is better to hire external forensic accountants to ensure that the findings are unbiased.  Companies may not like to idea of using external consultants and professional because it will increase the costs associated with an investigation.  However, an SEC investigation may end up costing a lot more than if the company conducted their own independent investigation without this additional scrutiny.  Further, in the event there is an SEC investigation, information obtained from the investigation can be a useful tool in defending against allegations. 

Although internal employees should not form part of the core audit committee or a special committee, their involvement is imperative.  For example, investigators may need assistance from the Chief Information Officers or the Information Technology staff about how the computer system functions.  It is important to involve I.T. because they can help to retain and compile important information and data.  Internal marketing and public relations personnel may also need to be contacted to teach them how to handle the media and to delay media press conferences.  Further, inside counsel should work very closely with external counsel.  This will set the tone for the investigation.  One of the roles of counsel is to advise employees not to communicate outside of the response team members.  Legal counsel should also get in contact with the insurers and demand payment of legal and forensic advisor fees.

Once the regulatory investigation commences, the company should continue their investigation so they have enough information about the scandal that they can use to appropriately defend themselves.  Essentially, a better-prepared company is better off in the long haul.  At the same time, the company may need to consider whether to enter into Joint Defence Agreements with witnesses.  JDA’s can be written or oral depending on the requirements of the jurisdiction. A JDA will have clauses that require that employees not talk to anyone else about information shared with employer.  However, the agreement does not generally preclude an employer from sharing information with the government.  This is primarily because the government doesn’t like JDAs if the agreement protects information shared by employees with their employers from being shared with the government. 

For employees who become subject to a regulatory investigation, issues about the company’s right to indemnify the employee may arise.  In a recent case the courts held that KPMG could not indemnify employee legal fees without creating additional liability issues for the company.  The panellist were concerned that if this becomes the standard, long-term issues may arise for the employee and employer relationship where a company refuses to indemnify an employee before the employee is found guilty.

Copyright ©


Feed You can follow this conversation by subscribing to the comment feed for this post.

Corporate Health Seminar

People are being made to work for ten to twelve hours on a rather regular frequency. This has led to an escalating number of people tending to take to junk food. This is especially the case when both partners are working; leaving neither with enough time to devote to healthy cooking and other related activities.

The comments to this entry are closed.