The retail giant now faces a host of potential legal and reputational risks. Wal-Mart's board will need to get to the bottom of the situation, but are they up to the task?

By Beth Kowitt, writer

FORTUNE -- Wal-Mart's board is about to step into the spotlight -- and don't expect the glare to subside any time soon.

Along with possible legal consequences, the retailer faces reputational risks and potential managerial disruption over allegations that executives shut down an internal bribery investigation into its Mexico operations in the middle of last decade. Facing claims that senior leaders were involved, Wal-Mart's (WMT) board will need to determine what happened, and who knew what and when.

"This is one of these nightmare situations for the board," said David Larcker, director of the corporate governance research program at Stanford's business school. "You have a responsibility to do risk management and pay attention to all these kinds of issues, but the problem is that, as a board member, you're not out there doing the internal auditing. You have to rely on information provided by managers."

Wal-Mart said in a statement yesterday that its audit committee launched an internal inquiry six months ago into the bribery and investigation issues reported by the New York Times over the weekend -- issues that the Times alleges current CEO Mike Duke and former CEO Lee Scott were aware of. Scott was CEO at the time, and Duke was head of international.

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Beyond the fact that Scott and Duke both sit on Wal-Mart's board, the story did not report that any of the company's directors were aware of the situation. This makes it critical that the company's audit committee, comprised of independent directors, take the lead on the current inquiry. A spokesperson for Wal-Mart declined to offer comment for this story. More