and Whistle-blower Protections
Phil Kleckner and Craig Jackson
Note: Part 1 of a series.
can only wonder how much damage would have been avoided
if Enron employee Sherron Watkins had blown the whistle
about the Sarbanes-Oxley Act has largely focused on corporate
governance and accounting independence issues for publicly
traded companies, and overlooked the implications for companies
whose employees “blow the whistle.” In fact,
Sarbanes-Oxley has increased the protection provided to
whistle-blowers in three major areas:
Publicly held companies are now required to have a venue
in place to receive the reports of anonymous whistle-blowers.
Section 302 of Sarbanes-Oxley states: “Each audit
committee shall establish procedures for the confidential,
anonymous submission by employees of the issuer of concerns
regarding questionable accounting or auditing matters.”
After receiving a report, any investigation conducted
must comply with section 806 of the act, which states
that “no publicly traded company, or any officer,
employee, contractor, subcontractor, or agent of such
company may discharge, demote, suspend, threaten, harass,
or in any other manner discriminate against an employee
in the terms and conditions of employment because of any
lawful act done by the employee.” What exactly can
be considered a threat? What constitutes harassment? How
do you know the identity of an anonymous whistle-blower?
Sarbanes-Oxley provisions have made it clear that retaliation
against whistle-blowers will not be tolerated. A new section,
1513(e), has been added to Title 18 of the U.S. Code.
It is now a criminal offense to retaliate against whistle-blowers,
carrying penalties from a large fine to 10 years in prison.
company policies may no longer be sufficient to meet the
requirements of section 806 of the act, which dictates the
course of action a company will be permitted to take to
address allegations of internal fraud. Before Sarbanes-Oxley,
an investigation undertaken by a company to look into allegations
of internal fraud could have uncovered the identity of the
whistle-blower. Now, an allegation by the whistle-blower
that she was “harassed or discriminated” against
could have a serious impact on the company.
an audit committee were to receive an anonymous letter regarding
employee fraud, it would seem logical to provide this information
to the company’s internal auditors. Unfortunately,
because internal auditors may be close to day-to-day operations,
it is conceivable that the identity of the whistle-blower
would be discovered by the internal auditors during the
investigation, which could lead to a claim of harassment
or discrimination. Similarly, if the audit committee were
to give the information to internal counsel, there is a
good chance the whistle-blower’s identity could be
806 of Sarbanes-Oxley has made it difficult for companies
to handle fraud investigations internally. Companies will
most likely retain outside special counsel in order to maintain
independence during investigations. Outside special counsel
has no motivation to seek out the identity of the whistle-blower.
They are merely concerned with ascertaining any truthfulness
behind the allegations found in the anonymous letter.
retention of outside counsel may not totally solve the problem.
Most fraud involves the unlawful depletion of company assets.
Therefore, the investigation will need the services of someone
with financial expertise. Because section 806 could disqualify
an internal audit, a company would be likely to retain its
external auditors to perform forensic work. However, the
Enron case demonstrated that the external auditor can become
so entwined with the leaders that it loses its independence
long before the company’s final crash. Section 201
of Sarbanes-Oxley makes it clear that public accountants
who audit a company’s financial statements are advocates
of the company, and cannot perform independent forensic
accountants are specialists that take traditional accounting
one step further and ask the question, Why? Unlike traditional
auditors and tax accountants, forensic accountants specialize
in areas such as fraud examination, business consulting,
business valuation, bankruptcy, and a number of others.
Forensic accountants are interested in providing tangible
services, not compliance services.
Sarbanes-Oxley Act, while only imposing regulation on public
companies, has presented some unique questions for non–publicly
held companies. For example, according to Sarbanes-Oxley,
a company’s auditor is prohibited from providing forensic
services to a client because of independence issues. However,
if the auditor’s client is not a publicly held company,
no independence issue exists. It will be interesting to
see a court’s reaction to this question. Private companies
would be wise to avoid jeopardizing themselves by raising
Sarbanes-Oxley Act’s improved whistle-blower protections
will go a long way toward ensuring that future frauds will
not occur. Companies will have to develop measures to investigate
whistle-blower reports that will investigate the accuracy
of the claim, and avoid any action that can be considered
harassment, discrimination, or threatening, while maintaining
the anonymity of the whistle-blower. The new penalties for
violating any of the above should be incentive enough to
ensure compliance. Furthermore, by forcing companies to
retain expertise from sources other than external auditors,
books and records will be more scrutinized than ever.
Kleckner, CFE, CPA/ABV, is the director in charge
of the business crimes group, and Craig Jackson,
MA, is an associate, both at RosenfarbWinters,
LLC, in Roseland, N.J.