Key Questions to Ask After a Compliance Failure

Even the Most Successful and Well-Managed Business is not Immune to Compliance Failure… 

Even the most successful and well-managed business is not immune to compliance failure. Whether it’s a data breach that could have been prevented or an employee complaint that was mismanaged, companies should always view missteps as a learning opportunity. After all, that’s the most effective way to prevent similar mistakes in the future.

Corporate Boards Neglect the Deep Dive

While it may make sense, many companies neglect to do a “deep dive” following a compliance failure. According to a recent report, “What’s the Tone at the Very Top? The Role of Boards in Overseeing Corporate Ethics and Compliance,” released by consulting firm LRN Corp., compliance still doesn’t get the attention that it deserves from corporate boards, even after something goes wrong.

A staggering 40 percent of the former chief ethics and compliance officers who were surveyed reported that their corporate boards did not conduct an in-depth investigation into the root cause following compliance failures and scandals. Many also don’t regularly assess their culture of compliance. “We don’t do culture diagnosis. Management and the board think they know the company culture but then are offended and surprised when something goes wrong,” one compliance officer stated.

Evaluating the Effectiveness of Corporate Compliance Programs

In 2017, the Department of Justice’s Criminal Division (DOJ) provided several important sample questions that its Fraud Section considers when evaluating a corporate compliance program. While the DOJ cautioned that the document should not serve as a “checklist,” it serves as an extremely useful starting point when evaluating the compliance issues that may have contributed to workplace misconduct or another compliance issue. Below are several examples:

• Analysis and Remediation of Underlying Misconduct: What is the company’s root cause analysis of the misconduct at issue? Were there prior opportunities to detect the misconduct in question, such as audit reports identifying relevant control failures or allegations, complaints, or investigations involving similar issues? What specific changes has the company made to reduce the risk that the same or similar issues will not occur in the future?
• Senior and Middle Management: How have senior leaders, through their words and actions, encouraged or discouraged the type of misconduct in question? What specific actions have senior leaders and other stakeholders (e.g., business and operational managers, Finance, Procurement, Legal, Human Resources) taken to demonstrate their commitment to compliance, including their remediation efforts? What types of information have the board of directors and senior management examined in their exercise of oversight in the area in which the misconduct occurred?
• Autonomy and Resources: Have there been specific instances where compliance raised concerns or objections in the area in which the wrongdoing occurred? How has the company responded to such compliance concerns? How have decisions been made about the allocation of personnel and resources for the compliance and relevant control functions in light of the company’s risk profile? Have the compliance and relevant control functions had direct reporting lines to anyone on the board of directors?
• Policies and Procedures: Has the company had policies and procedures that prohibited the misconduct? How has the company assessed whether these policies and procedures have been effectively implemented? How has the company communicated the policies and procedures relevant to the misconduct to relevant employees and third parties? What controls failed or were absent that would have detected or prevented the misconduct?
• Training and Communication: What training have employees in relevant control functions received? How has the company measured the effectiveness of the training? What has senior management done to let employees know the company’s position on the misconduct that occurred? What resources have been available to employees to provide guidance relating to compliance policies?
• Confidential Reporting and Investigation: How has the company collected, analyzed, and used information from its reporting mechanisms? How has the company ensured that the investigations have been properly scoped, and were independent, objective, appropriately conducted, and properly documented? Has the company’s investigation been used to identify root causes, system vulnerabilities, and accountability lapses, including among supervisory manager and senior executives?

Of course, this post provides a brief summary. The DOJ guidance includes additional questions that can help businesses evaluate the effectiveness of their compliance programs.

Even before a lapse occurs, it is imperative for businesses to regularly assess and test the effectiveness of their policies and procedures. At Scarinci and Hollenbeck, our business attorneys regularly assist companies of all sizes in conducting compliance audits and remedying any weaknesses that are detected.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Charles Yuen, at 201-806-3364.