August 2004

Sarbanes-Oxley Act (SOX) Section 301(4) requires all public companies to establish a means to collect, retain, and resolve claims regarding accounting, internal accounting controls and auditing matters.  The system must allow for such concerns to be submitted anonymously.  SOX provides significant protections to whistleblowers, and severe penalties to those that retaliate against them.

Most legal advisors suggest that this process be at least initially handled by an independent party.  Nevertheless, many companies faced with the high cost of other Sarbanes-Oxley compliance, avoid the relatively minor cost of using an outside party in this area.  (For more information regarding handling whistleblower complaints, see Most Whistleblower Systems are Incomplete and Cost More in the Long Run and Handling Whistleblowers is Tricky).

Recent information and regulatory announcements confirm that this is a big mistake. The Securities and Exchange Commission (SEC) established an electronic complaint system, which the SEC says is “a tremendous source of leads” for their enforcement efforts.  Complaints jumped from 77,000 in 2001, to 180,000 in 2003.  The current 2004 complaint annual pace is almost 500,000 – that is more than 1300 e-mail complaints every day!  According to John Stark of the SEC’s enforcement division, the majority of these complaints are about accounting problems at public companies – i.e., exactly what these same public companies are supposed to be collecting themselves pursuant to SOX Section 301(4).

This last week, the Public Company Accounting Oversight Board (PCAOB) opened a new hotline service that will make it easier for employees to report problems.  Reports can be submitted by phone at 800-741-3158, using an on-line form, and by email at Like the SEC’s system, complaints can be submitted anonymously.

It should be obvious that public companies are better off learning about complaints directly, rather than through a government regulator.  Companies with a whistleblower solution from an independent firm that uses competent personnel to collect complaints are much more likely to be able to proactively address employee concerns.  Doing so is more likely to give employees the confidence to use the company-provided solution, which will ultimately save money and provide a more controlled resolution.

Fulcrum Inquiry is a licensed CPA firm that provides a whistleblower collection and resolution service operated by trained forensic accountants.  Learn more about Whistleblower Hotline Solutions.