Formation of Special Purpose Committee
When companies face fraud such as intentional manipulation of financial statements or misappropriation of assets, formation of Special Purpose Committee (hereafter “SPC”) that includes members of outside experts (like lawyers and CPAs) and publication of the result investigated by the SPC have become popular In today’s business environment in Japan. The purpose of the formation of SPE is to clarify the facts behind the fraud thoroughly and recover the social credibility for that company.
Obviously, the fraud such as intentional manipulation of financial statements or misappropriation of assets should be detected and disclosed by the company itself that causes such fraud. We understand that the fraud investigation conducted by the internal members only might be quite effective and could be completed rapidly. However, the following issues on the internal fraud investigation can be seen;
- It might create unnecessary prejudice against the facts due to the deep knowledge about the industry practices.
- The company might mitigate the scope and subject of the investigation intentionally and with favoritism.
- The objectivity of the internal investigation might not be achieved due to the conflict of interest between the internal members of SPE and the suspect of fraud.
Therefore, the internal investigation by the company members alone might not be sufficient from the appropriate disclosure point of view.
In this respect, we recognize that the use of outside experts is meaningful. The independency of the SPC members on the company assures the credibility and objectivity of the investigation and expertise of the SPC members makes the result of the investigation accurate.
In recent years, the structure of SPC can be classified into the following three cases.
(1) Two SPCs are simultaneously formed; one consists of company internal members only (hereafter “internal committee”) and the other consists of outside experts (hereafter “external committee”).
In this case, the external committee makes review and assessment on the result of the investigation conducted by the internal committee.
(2) One SPC that consists of mixed (internal and external) members is formed.
In this case, external members of the SPE conduct their own investigation based on his or her expertise and experience. The results of the investigation by both parties are combined.
(3) SPC is formed by external member only.
In this case, this SPC exclusively conducts the fraud investigation. This structure is useful for the cases that the management involves the fraud directly, internal members have the conflict of interest and the fraud has significant social impact. However, even though the SPC that consists of outside experts only conduct the fraud investigation, the cooperation and coordination by the company must be crucial for the SPC due to the lack of understanding about the company practices and the industry. In most cases, the company sets up liaison desk in order to communicate smoothly.
Scope of the fraud investigation by SPC
In general, the scope of the fraud investigation is as follow:
- Fact finding
- Analysis of motives and causes of fraud
- Assessment of fraud investigation by internal committee (above case i)
- Suggestion for improvement / Assessment of improvement plan by the company
- Suggestion for penalties / Assessment of penalties proposed by the company
- Monitoring for the improvement
The members of YUSEI Audit & Co. have magnitude of experiences to be nominated as SPC members in previous fraud cases and actively assist companies that face such fraud with enough knowledge and experience in order to solve the various issues caused by the fraud.
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