Whistleblowing: The Devil Is in the Details

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Employees who have sought to “blow the whistle” on their employer’s unethical or illegal activities have discovered just how difficult whistleblowing really is. Cynthia Cooper, the former vice-president of internal audit at WorldCom, can tell you. In a room so silent you could hear a pin drop, I sat with hundreds of other accounting professionals as she spoke of her experience following her decision to go public with information on the WorldCom fraud. Her decision involved many conflicting emotions that pitted personal and organizational loyalties against what she knew to be “the right thing to do.” She even followed all the conventional wisdom and made every attempt to resolve the problematic issues through available internal procedures prior to going public.

According to the Association of Certified Fraud Examiners’ (ACFE) 2004 National Fraud Survey, tips from various sources (e.g., employees, vendors, customers, and anonymous) are the most common method for detecting fraud. In response to the many large corporate scandals, Congress passed the Sarbanes-Oxley Act (SOX), which sought to encourage employees and others to report unethical or illegal activities and to ensure protection for those individuals.

To that end, SOX requires that audit committees establish procedures, such as a hotline, for receiving and handling complaints and anonymous employee tips regarding questionable company accounting methods, internal controls, or auditing matters. An anonymous reporting mechanism also aids in compliance with the updated Federal Sentencing Guidelines and the New York Stock Exchange regulations. This type of procedure provides a low-risk way for whistleblowers to report fraud or other illegal activities.

Sarbanes-Oxley Act Provisions

SOX sections 806 and 1107 established new protections for corporate whistleblowers. Civil liability protection under section 806 made it illegal to retaliate against an employee of a publicly traded company for providing information regarding securities fraud or violation of SEC rules to a federal regulatory or law-enforcement agency, a member or committee of Congress, or a supervisor. Penalties for violating section 806 include compensatory damages to “make the employee whole,” such as reinstatement, back pay with interest, and litigation costs.

SOX section 1107 establishes criminal penalties for anyone retaliating against a whistleblower who has provided information to a law-enforcement officer regarding the commission, or possible commission, of any federal offense. This protection does not apply to reports made to supervisors or to Congress. The protections under section 1107 are broader, and they cover all individuals regardless of where they are employed. Fines of up to $250,000 and up to 10 years in jail may be imposed upon individuals for violating section 1107, while corporations may be fined up to $500,000.

Recent Supreme Court Ruling

In May, the U.S. Supreme Court ruled in the case of Garcetti v. Ceballos that statements made in the course of the whistleblower’s official job function are not constitutionally protected. According to some employment attorneys, this decision may have implications for SOX whistleblower cases. Although SOX section 806 is believed to protect employees who disclose a violation of federal law concerning securities fraud to a supervisor, it is unclear in the wake of Garcetti v. Ceballos whether such reporting is protected if employees are acting within the normal scope of their job. For example, are statements made by an internal auditor in the course of performing her usual duties regarding a publicly traded company’s financial practices covered as protected whistleblower activity under SOX? Some allege that this interpretation would affect an employer’s ability to make legitimate decisions regarding the performance of certain employees in sensitive finance and accounting positions.

Under the federal Whistleblower Protection Act, the courts have ruled that employees who do not take additional steps to report their concerns regarding specific illegal activity are not protected under whistleblower statutes. Some have postulated that to be protected as a whistleblower, an employee must report the illegal or fraudulent activity to an authority outside of the company.

In any event, the Supreme Court just made life a little tougher for whistleblowers. Whistleblowing can be a life-altering experience, and should be an action of last resort after all other channels of communication have been exhausted. One thing is certain: Before considering blowing the whistle, an individual should contact a competent, legal professional for advice on how to proceed.

As always, I welcome your comments on these and other issues.

Mary-Jo Kranacher, MBA, CPA, CFE
Editor-in-Chief
mkranacher@nysscpa.org