Employees may choose not to use internal channels, putting companies in an awkward position with the SEC.
Forward View by Tapestry Networks
If a depressed economic environment and increased regulatory scrutiny weren’t enough to raise company fears about the risks of financial fraud and malfeasance, Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) has made fraud top of mind for legal, compliance and risk executives and audit committee members.
By providing whistleblowers with financial incentives to report “original” information about securities laws violations directly to the SEC, this provision of the Act could lead employees to bypass the internal whistleblower programs established by companies in response to provisions of the Sarbanes-Oxley Act.
However, in its 3 November 2010 rule proposal the U.S. Securities and Exchange Commission (SEC) addressed this concern by stating that it will “treat an employee as a whistleblower under the SEC program as of the date that employee reports the information internally — as long as the employee provides the same information to the SEC within 90 days.”1 The SEC rule proposal sought public comment on ways in which the agency can encourage whistleblowers to first report their information through company compliance programs.
What can companies do?
Some companies are already considering fighting the SEC payout with their own financial incentives. Russ Ryan, a former assistant director in the Division of Enforcement and a partner at law firm King & Spalding, said, “Companies cannot as a practical matter compete with the amounts potentially available as SEC rewards, but they may want to consider building modest rewards into their incentive or bonus program to send a signal to employees that the company truly values the internal reporting of this kind of information.”
As companies consider such internal rewards, experts and audit committee chairs emphasize the need for increased vigilance in current ethics and compliance programs. Key priorities they’ve recently highlighted include:
- Investing more in communicating internal whistleblower processes. Audit committee chairs emphasize the need to ramp up such communications now, by training employees in which practices are not tolerable and on using tools like whistleblower hotlines.
- Enforcing codes of conduct. Audit committee chairs recognize that a key to decreasing incidences of fraud is enforcing a zero tolerance approach to those found not following the code.
- Obtaining a statement from departing employees. In many companies, HR regularly asks departing employees if they are aware of any wrongdoing, and the audit committee may interview departing senior finance.
- Using diagnostic tools. An audit committee chair suggested using diagnostic tools to help analyze information and identify patterns that might not otherwise come to light. One example would be reviewing similar transactions at the same time each month or analyzing journal entries just below the threshold for review by the internal or external auditor.
- Discussing concerns with random samplings of employees. Another audit committee chair said, "Internal audit proactively, selectively, picks people throughout the quarter and asks them a series of simple questions, instead of waiting for reports via the hotline."
Despite these proactive measures, Ryan pointed out that the new whistleblower reward will lead to more tips and therefore more investigations by the SEC.
In the event of a fraud, companies should undertake a thorough investigation that is organized and conducted properly, following standard practices in gathering documentary evidence and interviewing witnesses, and using outside experts as appropriate. The SEC will very quickly see if the investigation was independent and objective.
1 The Securities and Exchange Commission, "SEC Proposes New Whistleblower Program Under Dodd-Frank Act," press release, November 3, 2010.
Forward View is written by Tapestry Networks. Views expressed by Tapestry Networks are those of Tapestry Networks and not necessarily of Ernst & Young. Tapestry Networks convenes eight audit committee networks sponsored by Ernst & Young that collectively consist of more than 120 individuals, who chair more than 170 audit committees and sit on over 300 boards at some of the world’s most admired companies.
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