Astron in the Press

Whistle (blowing) While You Work – a Look at Sarbanes-Oxley

---

There was a time in the not-so-distant past when “whistleblowers,” employees who report illegal or wrongful activities of their employer or fellow employees, feared losing their jobs as a result of speaking up.  Then something happened that changed the face of whistle-blowing forever…the Enron scandal. 

In 2002, Sherron Watkins, Enron’s former Vice President of Corporate Development, became the most famous corporate whistleblower in recent history when she exposed former Enron Chairman and CEO Kenneth Lay's very questionable accounting practices.  After growing concern about the underhanded dealings at the company, Watkins sent a seven-page e-mail directly to Lay outlining the situation.  The scandal that ensued resulted in the largest corporate collapse in history, and the loss of thousands of innocent employees’ life savings.  The Enron name became synonymous with corporate fraud, conspiracy, and money laundering. 

The fall of Enron, as well as other corporate financial scandals, prompted the Sarbanes-Oxley Act (SOX) of 2002.  The Act, named after Maryland Democratic Senator Paul Sarbanes and Ohio Republican Representative Michael G. Oxley, was signed into federal law on July 30, 2002.  The law is considered the most important piece of corporate financial legislation in recent history. 

Although SOX contains many far-reaching financial provisions, there are two areas of special interest to HR professionals: the whistleblower protection provision and the 401(k) blackout provision.  Here, we will take a look at the whistleblowing provision.  The 401(k) provision will be covered in a future Astronology.

The Sarbanes-Oxley Act of 2002: New Federal Protection for Whistleblowers, “The Act protects an employee of a public company who reports conduct that he or she ‘reasonably believes’ involves a violation of federal securities laws, the rules or regulations of the Securities and Exchange Commission, or ‘any provision of federal law relating to fraud against shareholders.’ An employee will be protected even if the allegations of fraud are incorrect or unsubstantiated, as long as he or she ‘reasonably believes’ that conduct constitutes a violation.”

However, the act of whistleblowing must be conducted in a specific way.  The SHRM Legal report further states, “In order to be protected under the Act, the employee must be engaging in one of two types of reporting activities. First, the employee must raise the allegations of fraud to either a federal agency, a member of Congress, any person with supervisory authority over the employee, or any other person working for the company who has ‘the authority to investigate, discover, or terminate misconduct.’ Thus, an employee who reports allegations of fraud to a supervisor, an ombudsperson, or even a human resources official may fall within the protections of the Act. Second, an employee will be protected if he or she files, testifies in, participates in, or otherwise assists in, a proceeding relating to securities fraud.”

There are serious criminal sanctions for those employers who do not comply.  As explained in the New York State HR Review Blowing the Whistle, Dealing with Sarbanes-Oxley and Beyond,” “Unlike other whistle-blowing statutes, Sarbanes-Oxley provides for criminal sanctions against individuals who retaliate against whistleblowers.  If you’re a human resource decision-maker, you need to be careful before you take adverse employment action against a whistle-blowing employee.”  Criminal penalties can include fines and imprisonment for up to ten years. 

According to the Workforce “A Key Role in a Complex Compliance Picture,” “Ignorance of this law could get human resources executives in trouble in unexpected ways. According to pre-Sarbanes industry practice, ‘performance records could be destroyed as they aged off,’ said Garry Mathiason, Partner, Littler Mendelson. But if you destroy those records now, ‘you could potentially be prosecuted under Sarbanes’ record-retention provision,’ which is intended to protect whistle-blowers against employers that falsely claim to be terminating an employee for poor performance.”  Employers should also keep in mind that if a whistle-blowing claim is filed anonymously, they could still be under fire if the whistleblower believes that their termination was somehow a result of their identity being ‘found out’.”

HR managers have been making changes to ensure that their organizations are in compliance.  In some cases, however, these changes are coming slowly.  During the week of July 15 – 22, 2003, SHRM asked 166 randomly selected HR professionals “What change, if any, has your organization made as a result of the Sarbanes-Oxley Act?”  The results were surprising.  At that time, more than half (55%) had done nothing. 

Although there are laws protecting whistleblowers who work for non-profits, there has been a push to adopt portions of SOX into the non-profit sector.  According to a recent study by the accounting firm Grant Thornton LLP, it was reported that 48% of the nation's non-profits have made voluntary changes to their governance practices since the passage of SOX.  This includes rewriting corporate charters, redrafting conflict of interest policies, and, in some instances, performing costly examinations of their internal controls.

For all organizations, being unprepared for a whistleblowing incident can be detrimental. The New York State HR Review article mentioned earlier provides a detailed guide to the right way for HR professionals to respond to whistleblower complaints:

·        Recognize Complaints – Train supervisors and managers to recognize and separate frivolous complaints from whistleblower activity.

·        Investigate Complaints – Institute a prompt and thorough investigation to address the allegations.

·        Document the Investigation – Establish the appropriateness of the investigation through documentation and fact gathering.

·        Remediate the Complaint – Assess the allegations after the investigation in order to determine what action needs to take place next.

·        Debrief the Complainant – Although highly confidential details of the investigation do not need to be shared, it is important to follow up with the whistleblower.  

·        Have a Game Plan – Once the allegations have been addressed, work to improve the processes to avoid future complaints.

·        Follow Your Policy – Follow your existing company policy, even if you plan on revising it.  Failure to follow existing policy during a pending investigation often causes problems in whistleblower litigation.

Whistleblowing compliance should be a critical aspect of HR and not taken lightly.  Remember, Enron was once a thriving multi-million dollar company.  Enron even landed the prestigious title of “America’s Most Innovative Company” five years in row by Fortune Magazine before falling into bankruptcy. SOX protects not only whistleblowers but also the reputation of your organization, your employees, and yourself.