Whistleblower Allegations on Financial Fraud

Should independent directors (“IDs”) for publicly listed companies conduct an independent investigation or accept management’s response?

When a financial fraud allegation is raised against a publicly listed company, independent directors are often faced with the question of whether to conduct an independent investigation or accept management’s response to the allegations. The advantages of the latter include cost effectiveness, time saving and being able to provide a direct response to the allegations. Is this really the case though?

Management’s Response

Management’s remuneration is often pegged to certain key indicators of the company’s performance. Hence, having management respond to a financial fraud allegation, which may potentially affect their performance, reduces the independence of their responses.

IDs are bound not just ethically, but also by relevant local rules, regulations and laws to address the crux of the issue: Did management know about the fraud and what actions did they take to prevent and remediate the situation?

In this article, FTI Consulting walks through an investigation process to understand the IDs’ obligations when they receive a financial fraud allegation.