Sarbanes Oxley Whistleblower Investigations

Using an Outside Specialist for Sarbanes Oxley Whistleblower Investigations

"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 p Representing whistleblowers rotect 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 with management.

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.