Sarbanes Oxley Whistleblower Investigations
Using an Outside Specialist for Sarbanes Oxley Whistleblower
"Finally, I would suggest that the company consider
conducting an independent internal investigation -- and I stress the
term 'independent,' in definition as well as spirit." - From speech
by Cynthia A. Glassman, Commissioner, U.S. Securities and Exchange
Commission, London, England, March 2, 2005".
The expansion of whistleblower protection and penalties for non-compliance under the
Sarbanes-Oxley Act (SOX) has created a need for independent specialists to act as
private investigators and issue reports on whistleblower complaints that appear to be credible. Often
the company's regular accounting firms and law firms cannot be said to be truly independent.
Tollefsen Law can provide the need independence and expertise in a wide range of corporate investigations.
Rights of Whistleblowers
Sarbanes-Oxley has increased the protection provided to whistleblowers who work for
publicly held companies. It
has changed former practice in several respects:
1) Audit Committees must monitor whistleblower
reports. Publicly held companies must provide a venue to receive the
reports of anonymous whistleblowers. Section 302 of SOX: “Each audit
committee shall establish procedures for the confidential, anonymous
submission by employees of the issuer of concerns regarding
questionable accounting or auditing matters.”
2) The company must take reasonable
precautions to protect the anonymity of the whistleblower and may
not discriminate against the whistleblower. Sox section 806 provides
“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.” Section1513(e), of
Title 18 of the U.S. Code makes it a criminal offense to retaliate
against whistleblowers. Violators are subject to large fines and a
maximum ten year prison term.
3) Outside special counsel is needed. The role
of internal auditors to investigate whistleblower reports is
reduced. Since internal auditors may discover the identity of the
whistleblower during their investigation and have difficulty keeping
his or her identity confidential, the company may be subject to a
claim of harassment or discrimination. Similarly, if the audit
committee were to give the information to in-house counsel, there is
a risk that the identity of the whistleblower would be leaked. There
could be claims of management bias. Section 806 of SOX makes it
difficult for companies to handle fraud investigations internally.
Outside special counsel has no motivation to seek out the identity
of the whistle-blower or to discriminate. Special counsel is in a
better position to keep the whistleblower's identity confidential
and focus on determining the truthfulness of the allegations. Often
the allegation includes the misconduct of senior management.
Internal auditors and even regular outside professionals may have
potential conflicts and have an appearance of bias in favor of
management. The Enron case demonstrated that opinions by outside law
firms and accounting firms can be influenced by their relationship
4) Hiring a Certified Fraud Examiner (CFE)
and Certified Controls Specialist as the private investigator should be considered. Most fraud
includes unlawful depletion of company assets. The investigator
should have financial expertise. CFE's must are trained in four
professions (law - accounting - criminology-investigations) and must
maintain their certification through at least 20 hours of continuing
education per year.