SOX Whistleblower Protection Covers Certain Private Company Employees

|||SOX Whistleblower Protection Covers Certain Private Company Employees

SOX Whistleblower Protection Covers Certain Private Company Employees

March 2014

The Supreme Court has held in the case of Lawson v. FMR LLC that the whistleblower protection available under the Sarbanes-Oxley Act of 2002 (“SOX”) properly extends to employees of privately held contractors and subcontractors who perform work for a public company.  Although the case in question was brought by employees of advisors to a public mutual fund, the ruling extends to other service providers, such as law firms and accounting firms.

Privately owned companies that serve publicly traded companies should examine their policies to ensure they are in compliance and provide protection against retaliation for employees who may whistleblow on activities at their public clients.  SOX’s whistleblowing provision concerns the broad areas of accounting, auditing, and internal accounting controls and provides widespread protection.  SOX Section 806 provides job security and monetary damages if retaliation occurs against an employee that reports anything that the employee reasonably believes may be a violation of any securities law, any rule of the Securities and Exchange Commission (“SEC”), or any other federal law. Section 1107 further complicates the issue by providing criminal and monetary penalties against individuals or companies that provide such retaliation, on top of the civil remedies the employee has through Section 806.

Whistleblower retaliation is reportedly on the rise and a number of high profile recent cases have provided multi-million dollar damage awards for employees.  This increase occurs in part because workers and employers now view retaliation in a broader light.  According to survey of ethics and compliance officers, human resources, internal auditors, legal counsel and other senior executives conducted by NAVEX Global:

“Retaliation claims are expected to rise in volume, and the very definition of retaliation is also changing among employees. The survey results suggest a richer understanding of retaliation among both senior executives and rank and file employees. While once viewed as strictly a firing or demotion, the definition of retaliation now includes being shunned or being the target of negative comments from peers. Social media is also creating a new dimension to potential retaliation, as employers determine how to handle emerging issues such as cyber bullying and social media disclosures. “

When whistleblowing reports initially come to a person within a company, subsequent employee discipline or perceived poor treatment may allow the employee to assert that the action was in retaliation to the whistleblowing complaint.  The risk of retaliation claims increase with greater internal involvement, which provides a strong case for setting up a whistleblower hotline through an outside service provider.  If handling these sensitive issues internally causes additional allegations of impropriety, any perceived cost savings by not providing a hotline will quickly disappear.

However, not all hotlines are created equal and some may not provide sufficient information to appropriately report all the relevant information.  Most hotline vendors perform their assignment with telephone operators inexperienced in accounting matters. These people cannot be expected to understand the complexities involved with accounting, auditing, and internal accounting controls or ask questions that will facilitate a further investigation and ultimate disposition.  A hotline that does not inspire confidence in the person utilizing it may cause them to revisit the matter with internal personnel and therefore eliminate the protections it is intended to provide.  Using an independent outside vendor skilled in accounting and auditing provides a much better result.

Fulcrum Inquiry is a forensic accounting firm that performs fraud and accounting investigations. We use this experience in operating whistleblower collection mechanisms that improve governance processes for public and private businesses, as well as nonprofit organizations.

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