Forewarned is Forearmed – The Case for Self Investigation

January 24, 2023

Background investigations of counterparties in business transactions have been part of the business landscape for decades.  Commercial lenders, investors, business partners, underwriters, accounting firms, banks, and other legal entities routinely conduct background investigations before moving forward with a transaction, consummating a new business relationship or taking on a new customer.  The investigating party is hoping to find nothing in the other party’s background that could give rise to liability or undue risk.  Periodically, your organization and executives may need to submit to a background investigation for various reasons. A loan.  A new banking or investment banking relationship.  A change of accounting firms.  An infusion of investment capital.  A public offering.  These are fairly benign interactions until and unless there are adverse findings to explain.  If you are hearing about these findings for the first time, there’s a risk that the important relationship or transaction under consideration may not go forward. Such investigations are often the first time company executives are hearing about the adverse findings.  When this is the case, it not only puts the new relationship at risk, it forces company executives to scramble to try to salvage it while also trying to better understanding the findings. The findings themselves can be damaging but so can the fact that company leadership was not aware.

How can a situation like this be avoided?

Increasingly, organizations are retaining outside investigative firms to perform a comprehensive due diligence investigation of the company and its key executives following the same type of scope a counterparty would employ.  The resulting report is then reviewed with the investigative team and relevant company stakeholders during which the findings are discussed.  If the findings are not self explanatory, explanations and additional context are elicited along with any supporting documents.  The newly provided information is then carefully evaluated by the investigative team to gauge whether any targeted investigative research or other investigative steps can be taken in an effort to independently confirm the new information.  Once completed, the report is updated to reflect all of the additional work and findings and reissued.

Having such a report at hand has several benefits. It enables the leadership team to proactively disclose some or all of the findings before a third party investigation is ever performed. These “mea culpas” tend to be viewed positively since doing so shows accountability, good governance and transparency.  Having this information beforehand not only keeps the organization from being on the defensive, it enables the company to frame the issues in a thoughtful way, offer reasonable explanations that are backed by supporting documentation and demonstrate that they are being transparent and acting with integrity.  Organizational leaders should be asking themselves the question, “do we know everything there is to know about our organization and leadership team?”  If the answer is no,  the next question should be “what are you waiting for?”

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