Private companies, including family-owned businesses and employee stock ownership plans (ESOPs), face unique challenges in conducting internal investigations due to the lack of formal protocols and oversight mechanisms common in public companies. These gaps can increase risk, especially when allegations involve management or financial integrity.
Key Considerations for Investigations
- Board Involvement: Necessary when allegations involve management, legal violations, or reputational/financial risks. The audit committee chair often leads, possibly forming a special committee and engaging external experts.
- Scope and Stakeholders: Investigations should be proportionate, focused on specific allegations, and shaped by the needs of auditors and shareholders.
- External Advisors: Legal counsel and forensic accountants are essential when legal or integrity issues arise, ensuring objectivity and protecting confidentiality.
Common Pitfalls
- Bias and Dismissal: Reputation-based assumptions and confirmation bias can undermine credibility.
- Scope Limitation: Budget-driven or overly narrow scopes may fail to address core issues.
- Rushed Timelines: Pressure to expedite investigations can compromise thoroughness.
- Untrained Teams: Lack of investigative expertise can invalidate findings, especially in auditor reviews.
- Parallel Investigations: Informal inquiries by management can disrupt formal processes and threaten legal protections.
ESOP-Specific Guidelines
- Governed by the Employee Retirement Income Security Act (ERISA), ESOPs must follow fiduciary standards like the prudent expert and exclusive purpose rules.
- Investigations must be initiated by the ESOP trustee — not the board — and must avoid conflicts of interest.
- Thorough documentation and independence are critical to compliance.
Building Resilience
Effective investigations may lead to disruption but ultimately strengthen internal controls, transparency, and stakeholder trust. By adopting public company best practices — such as independence, proper scope, and trained personnel — private companies can better manage risks and demonstrate accountability.
To read the full article by Dan Torpey, please visit PrivateCompanyDirector.com.
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© Copyright 2025. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
