Deciding Whether and How to Conduct an Internal Corporate Investigation

Lesley Brovner & Mark Peters
October 28, 2025

The Critical First Step

When corporate leaders learn of potential misconduct inside their organization, one of the most important—and sensitive—decisions they face is whether and how to conduct an internal investigation. In today’s highly regulated environment, ignoring red flags is not an option. A well-planned investigation can uncover wrongdoing early, help meet legal duties, and protect the company’s reputation before regulators or shareholders intervene.

At Peters Brovner, we counsel boards and executives on how to make these threshold determinations—balancing legal obligations, business risks, and cost considerations.

Why Choosing to Investigate Is Not Optional

In decades past, some companies debated whether an internal inquiry was necessary at all. Now, failure to investigate potential misconduct can expose management and directors to serious liability.

Employee misconduct may reveal systemic issues that, left unchecked, could lead to lawsuits, criminal exposure, or government penalties. Simply punishing employees without understanding what went wrong risks further legal trouble. A thorough internal investigation helps management assess the full scope of any problem and take corrective action to prevent recurrence.

In many cases, federal, state, or local laws effectively require an investigation once allegations arise. For example:

• Section 10A of the Securities Exchange Act compels auditors to act if they learn of potential illegal conduct.
• SEC and DOJ policies emphasize that companies must investigate possible violations to avoid or mitigate penalties.
• Fiduciary duties under corporate law require directors to act loyally and prudently in managing the company’s assets.
• Occupational Safety and Health Administration (OSHA) rules demand employers respond to workplace safety incidents.
• Title IX can reach any entity receiving federal funds, requiring investigation of harassment or discrimination claims.

These overlapping obligations make the decision to investigate a matter of both legal compliance and sound corporate governance.

Legal Duties Driving the Need for Internal Investigations

Directors and officers owe fiduciary duties of care and loyalty. If company funds are misused or diverted, leadership may have a duty to investigate and, if necessary, pursue recovery. Courts—including the Delaware Supreme Court—have held that directors can be personally liable if they utterly fail to implement or monitor compliance systems.

Corporations can also be held civilly or criminally liable for employee misconduct when management knew—or should have known—of the wrongdoing. In public companies, material information about illegal acts may need to be disclosed in SEC filings. Failing to investigate can lead to inaccurate disclosures and potential securities-fraud exposure.

Regulatory agencies such as the Federal Communications Commission, OSHA, and others impose similar duties to verify the accuracy of submissions and ensure that corporate operations meet statutory standards. An internal investigation can provide the factual basis needed to satisfy these obligations and demonstrate diligence to regulators.

Practical Reasons to Investigate

Beyond legal mandates, there are compelling business reasons to act proactively:

• Avoiding Government Scrutiny: A credible internal review, followed by remediation, can convince regulators or shareholders that no further action is necessary.
• Managing Disclosures: Conducting the investigation internally allows a company to control timing and presentation of any public statements.
• Preserving Reputation: Transparent self-policing can reassure investors, lenders, and customers of management’s integrity.
• Supporting Defense of Claims: A documented, independent investigation can be invaluable if shareholders later bring a derivative suit.

Recent Department of Justice policies underscore these advantages. The DOJ now offers significant reductions in corporate penalties—up to 75 percent off the lower end of the Sentencing Guidelines—for companies that promptly self-disclose, cooperate, and remediate misconduct.

Balancing the Costs and Risks

Internal investigations can be expensive and disruptive. Legal fees, forensic accounting costs, and the time executives spend on interviews and document reviews can add up quickly. For smaller companies, the cost of investigating may seem higher than defending a government inquiry.

However, the cost of inaction is often greater. If regulators later uncover issues that management ignored, penalties, fines, and reputational damage can far exceed the expense of a well-managed internal review.

The discovery of incriminating information also presents risk. Investigations can reveal facts that must be disclosed to authorities or investors, potentially triggering enforcement actions. Still, voluntary disclosure—when done strategically—often leads to more favorable outcomes than concealment or delay.

Who Should Control the Investigation

Determining who oversees and controls an internal investigation is a crucial step that affects credibility and independence. Control may rest with:

• Management, for routine or low-risk matters
• The Board of Directors or an Audit Committee, for more serious issues
• A Special Committee of independent directors, when allegations involve senior management
• Independent outside counsel, for maximum impartiality

Regulators place great weight on independence. If senior executives or directors are potential subjects, management-run inquiries may lack credibility. In such cases, delegating authority to a special committee advised by independent counsel helps ensure objectivity and regulatory confidence.

When investigations stem from government consent decrees, agencies like the SEC or DOJ may even require that the company hire independent counsel or new outside directors to oversee the process.

Who Should Conduct the Investigation

The professionals who handle the day-to-day work of an internal investigation play an equally important role. Options include:

1. In-House Counsel – Cost-effective and familiar with company operations, but independence can be questioned if senior management is implicated.
2. Regular Outside Counsel – Offers credibility and resources, though longstanding relationships with management can create perceived conflicts.
3. Special Outside Counsel – The preferred choice for serious or high-profile matters. Independent firms experienced in investigations bring expertise, efficiency, and credibility with regulators.
4. Auditors or Consultants – Valuable for financial or technical issues, but they lack attorney-client privilege protections and experience in managing sensitive legal findings.

For most situations, placing ultimate responsibility with independent outside counsel—supported by auditors or other experts as needed—offers the best balance of legal protection and investigative rigor.

Building Credibility Through Independence and Transparency

A credible investigation must be impartial in both fact and appearance. Regulators, courts, and shareholders will give weight to investigations that show independence, thoroughness, and a willingness to act on findings.

To strengthen credibility:

• Involve individuals with no personal stake in the outcome.
• Maintain confidentiality and privilege to the fullest extent possible.
• Provide the board with regular updates and document all investigative steps.
• Implement prompt corrective measures once findings are established.

When properly executed, an internal investigation not only mitigates legal exposure but also signals a company’s commitment to ethical governance.

Conclusion

In today’s environment of heightened regulatory scrutiny, deciding whether and how to investigate potential misconduct is a fundamental aspect of corporate governance. Companies that approach these decisions thoughtfully—balancing legal duties, business realities, and independence—are best positioned to manage risk and preserve stakeholder confidence.

Contact Peters Brovner

At Peters Brovner, our attorneys bring extensive experience in government oversight and corporate accountability. We advise companies, boards, and audit committees on every stage of the internal investigation process—from the initial decision to investigate through resolution and remediation.

If your organization is facing allegations of misconduct, a whistleblower report, or regulatory inquiry, contact Peters Brovner today. Our team will help you navigate these challenges with discretion, independence, and a clear focus on protecting your business and reputation.