NE OF THE greatest challenges that officers and directors of public companies can face is being called upon to respond to the discovery that the financial statements of the company they serve have been materially misstated. Among other things, they must investigate the basis of the misstatement; work with the company’s outside accountants to issue restated financial statements, calm shareholders, lenders and others with relationships to the company, and defend civil actions, including class action litigations (which regularly follow the announcement of financial accounting problems).
In addition, once news of a significant accounting irregularities problem has surfaced, it is likely that various governmental agencies, such as the Securities and Exchange Commission (SEC) and the Justice Department, will launch an investigation. These investigations have to be handled with great care, as the penalties assessed against the company and its officers, and the consequences to the company, can be severe. As one commentator recently observed, “[t]he costs include the possibility of a criminal investigation, and, in serious cases, senior corporate executives going to prison. According to one report, once accounting irregularities have surfaced, it is more likely than not that the company will soon be undergoing a bankruptcy or other major structural change.”[1]�
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