Employers must be prepared to follow new legislation that has been enacted to increase protections for whistleblowers. The recent passing of the Dodd-Frank Act continues to follow the trend towards putting an end to whistleblower retaliation- as well as rewarding whistleblowers for bringing forward evidence of unethical or criminal acts taking place within an organization. Whistleblowers can become victims of retaliation whether it comes from managers or fellow employees.

Employers have a responsibility to their employees to protect them from retaliation, which has resulted in a number of companies going above and beyond the law to develop their own programs to protect whistleblowers. In a previous post, “Vicki Sweeney of KPMG Presents Best Practices in Preventing and Monitoring Workplace Retaliation,” I discussed the retaliation monitoring program in place at KPMG, to further assist in protecting whistleblowers at KPMG. This post will focus on the expansion of the whistleblower protections under the Sarbanes-Oxley Act and financial incentives for whistleblowers, which have both been included in the Dodd-Frank financial reform legislation.

Enhanced Protections Under the Dodd-Frank Act

The Dodd-Frank Act includes a major expansion of the whistleblower protections outlined in the Sarbanes-Oxley (SOX) and Consumer Protection Acts. As outlined in Section 922 of the Act, here are some of the protections employers will need to draw attention to include:

• Prohibiting Retaliation: Employers cannot demote, discharge, suspend, threaten, harass or discriminate against whistleblowers in any way for disclosing information protected under SOX and the Securities Exchange Act. If an employee believes they have been retaliated against, they can bring their case to court. Wrongful dismissal claims must be filed within six years of the violation occurring or three years after the date when the claim is known. In any case, action in a wrongful termination suit must be filed within 10 years from the date the violation occurred.
• Bringing  a Complaint Forward: Originally, whistleblowers only had 90 days to bring a claim forward. Now, that time span has been doubled, giving whistleblowers 180 days from the point of initial discovery, to make a claim.
• Expansion of “Covered” Groups: Employees from publicly traded companies are now granted whistleblower protections under the Dodd-Frank Act.
• Establishment of the SEC Whistleblower Office: Under section 924 of the act, the SEC has until April 2011 to launch a whistleblower office. The whistleblower office will administer and enforce the amended provisions of the Securities Exchange Act to comply with the Dodd-Frank Bill. The Bill also states that the SEC whistleblower office must report annually to the “Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on its activities, whistleblower complaints, and the response of the Commission to such complaints.”

Whistleblower Rewards

Being a whistleblower isn’t easy. When an employee makes the decision to come forward with information regarding workplace misconduct, it usually results in retaliation or job loss. For many, their reputation takes the largest hit, making it difficult to stay in their current position within the company, or seek alternative employment. Whistleblowers seem to pay a pretty large price for doing the right thing – which has been taken into consideration with the Dodd-Frank Act.

Included in the Dodd-Frank Act are amendments to the Securities Exchange Act, providing increased financial incentives for whistleblowers. As outlined in Section 922 of the Act, here is an overview of the financial incentives in place for whistleblowers:

• Eligibility to be Granted an Award: Awards can be granted to one or more whistleblowers who volunteer original information to the SEC, which leads to the successful enforcement of the covered action.
• Award Amounts: Whistleblowers can receive anywhere from 10-30% of the total amount collected from the monetary penalties- exceeding $1 million, imposed on the guilty party.
• Determining the Amount of the Award: The amount awarded to the whistleblower(s) will vary on a case-by-case basis and is determined by the SEC. The SEC will take a number of factors into consideration including: significance of the information presented by the whistleblower, the degree of assistance provided by a whistleblower and any legal representative on their behalf and the interest of the SEC in fighting back against securities violations by encouraging whistleblowers to bring information forward.

I’m not too sure how effective financial incentives will be in encouraging employees to blow the whistle on someone in their organization. However, the award amounts mentioned above are a significant increase compared to the sums previously awarded to whistleblowers. According to the CFO Magazine article “Paid to Whistle,”:

“Before, the SEC could reward only whistleblowers involved in insider-trading cases. And the commission has been stingy: during its 20-year existence, the SEC’s whistle-blower program has paid out only $159,537 to five claimants.”‘

A study conducted at the University of Hampshire has lead to some interesting conclusions regarding the handling of tips provided through anonymous reporting tools for whistleblowers. The study is titled “Effects of Anonymous Whistle-Blowing and Perceived Reputation Threats on Investigations of Whistle-Blowing Allegations by Audit Committee Members” and has been published in the Journal of Management Studies by Wiley Publications. The study is also the first study based on the effects of anonymous reporting and the threats whistleblowing imposes on the reputation of those within the company associated with committing fraud.

The overall conclusion of the study is that anonymous whistleblower systems are ineffective, as many of the tips received through anonymous sources are ignored and deemed “less credible” than those reported through non-anonymous means.

Disturbing Conclusions:

The Sarbanes Oxley Act passed in 2002 requires audit committees of publicly traded companies to have an anonymous whistleblowing channel accessible to employees for reporting instances of internal financial fraud. The reasoning behind keeping the system anonymous is for whistleblower protection from workplace retaliation or prosecution. This study has questioned the effectiveness of anonymous reporting systems. In the article “Anonymous Whistle-Blowing Systems Are Often Dysfunctional“, Co-author of the study, Jacob Rose stated that:

“We concluded that audit committee members who evaluate whistleblowing allegations, and determine whether or not allegations should be investigated, treat anonymous and non-anonymous allegations very differently. Audit committee members find anonymous allegations to be less credible than non-anonymous ones. As a result, audit committee members often choose not to investigate an anonymous allegation, even when the allegation indicates very serious threats to the integrity of the financial reporting system. When an identical allegation is not anonymous, audit committees allocate significant resources to the investigation of the allegation. In brief, anonymous allegations appear to be ignored in many cases.”

The findings in this study demonstrate that those involved in the study have been using anonymity and reputation as a way to prioritize and distinguish between cases worthy of investigation. This method is unprofessional and needs to be fixed, as many are even admitting that the leads they have received through anonymous reporting tools have been qualified as posing a threat to the company. This method would certainly not hold up in court, as the law requires employers to demonstrate an immediate reaction to any tip received through instated reporting channels- many companies have developed a policy for conducting preliminary investigations that determine if the issue reported needs to be investigated any further.  Rose also noted an additional finding in their results:

“What is particularly disturbing, however, is that we also find evidence that reputation threats faced by corporate directors have significant influences on decisions to investigate allegations. Essentially, when audit committee members recognize that an allegation threatens their reputations, they have incentives to not investigate the allegation. These incentives cause the audit committee members to perceive that the allegation is less credible, which provides justification for deciding not to investigate the allegation. The data indicates that reputation threats can create conflicts of interest, and directors appear to favor personal reputations over obligations to oversee financial reporting quality.”

Necessary Changes

The purpose of a reporting system is to identify fraudulent actions, catch those responsible for the act and decrease the level of risk within the company to avoid negative media attention and significant fines. This case raises the question, who makes the decision whether to investigate a tip or not? It’s important that companies select people for this position wisely, as the person must be neutral to reputation threats, in order to make sure that each case receives a fair evaluation before deciding not to follow through with an investigation. In many cases, this role is taken on by a third party that handles the responsibility of maintaining anonymity for claimants throughout the investigation process.

Anne Simmons is the co-founder, president and CEO of Board Advisory Services, she contributed an article to Ethisphere entitled, “Want to Avoid Unpleasant Compliance Surprises? Embrace a Strong Whistleblowing Policy.” In this article, she suggests:

“Emphasize the company’s, as well as your own commitment to non-retaliation. Word will quickly spread that ethics is an important part of the company’s culture and that employees should feel safe reporting wrongdoing. Work with a third-party to develop a system for collecting reports, verifying the information from employees anonymously and following up with those employees while still maintaining their privacy. Block mid-level interference- reports of wrongdoing, once vetted by a third-party, should go to the Board. Exposure to the Board all but mandates that serious issues be investigated. Failure to do so usually results in cover-ups or sidetracking by those responsible for troubles.”

You may also want to focus on developing a conflict of interest policy that covers conflicts of interest throughout your entire organization- particularly when handling investigation decisions. Many of the respondents in the study reported that the decision to investigate or not was based on the ability to protect employee reputations, therefore, the issue of conflicting interests hindered their judgment of the situation.

To provide some insight on what to consider when developing policies to eliminate conflict of interest in your workplace, Brad Holman, Investigative Specialist at IRG writes the following about conflict of interest:

“It’s important that an organization’s culture be consistent to understand what a conflict of interest is. Organizational values such as honesty, integrity, professionalism, trust, commitment, competency, excellence and credibility are fundamental in the development of effective conflict of interest policies. It’s important that a comprehensive risk and threat analysis be completed- including a review of existing policies, guidelines, culture, legislative and employee expectations. Once completed, the development of an action plan to mitigate the risks can be undertaken.

Additionally, culture must foster an environment where all employees, from top to bottom, are expected to avoid situations of conflict and immediately and willingly disclose any pecuniary interests. This is particularly important in the fields of finance, securing contracts, procurement of any goods and services, and human resources where nepotism can be problematic.”

There are lots of different ways that fraud is uncovered in the workplace. It may surprise many of you that it’s not the SEC you should fear- it’s your own employees. Employee whistleblowing continues to rise and has uncovered major fraud cases such as Enron, Pfizer and WorldCom. In the Dallasnews.com article “Whistleblowers Find More Corporate Fraud Than Regulators” they have reported that in the healthcare field, 41% of fraud cases are uncovered thanks to employees making the decision to blow the whistle. Today, many companies are encouraging their employees to report cases of fraud that they discover in the workplace, the only problem is, when employees step up to the plate, many of them still end up losing their jobs and facing retaliation the leads to them quitting. Many whistleblowers have been asked if they would do it again- most of them have said no.

The Rise of the Whistleblower

A recent study that was released in The Journal of Finance, “Who Blows the Whistle on Corporate Fraud?” has reported that Securities and Exchange Commissioners aren’t necessarily the ones that corrupt executives and employees should be afraid of. When it comes to reporting workplace fraud, the study reported that overall, 17% of the 216 cases they reviewed were uncovered thanks to employees within the company. SEC regulators only accounted for reporting 6.6% of the fraudulent cases reviewed.

The report gives two very different reasons regarding incentives or reasoning behind a whistleblowers decision to bring fraudulent actions public:

One reason is the fact that

“On occasion, employees can gain from whistleblowing. When employees can bring a qui tam suit that the company has defrauded the government, whistleblowers stand to win big time: on average our sample of successful qui tam whistleblowers collect $46.7 million.”

On the other end of the spectrum, the decision to blow the whistle has more to do with ethics rather than monetary gain.

“For many employee whistleblowers the more important benefit to avoiding the potential legal liability which arises from being involved in a fraud. These types of employee whistleblowers face significant costs. In 45% of the cases, the whistle-blower doesn’t identify themselves individually to avoid the penalties associated with bringing bad news to light. In 82% of cases with named employees, the individual alleges that they were fired, quit under duress, or had significantly altered responsibilities as a result of bringing the fraud to light. “

Implications for Your Business

If you want to know if there are any fraudulent acts occurring within your company- your employees are usually the ones to ask. Since employees are the ones who deal with certain tasks on a day-to-day basis, being on the front lines puts them in a better position to know what is happening in each area of the company. The best whistleblower protection comes from company policies and practices once fraud has been uncovered and the whistle has been blown.

These protections tend to be left in the hands of employers, as there are too many grey areas surrounding whistleblower protection laws based on the nature of the fraud detected, the industry in which the employee works and the state in which the fraud was detected. It’s also important to consider the backlash your company takes when they develop a reputation for mistreating whistleblowers and employees who try to correct company wrongdoings in order to protect the public and the investors.

Business Intelligence at Work discusses the importance of internal investigations and their impact on a whistleblower case:

“Whether your firm is publicly- or privately-held, a well-run internal investigation designed to produce credible results can turn a potential corporate crisis into a valuable opportunity to enhance a company’s reputation. The credibility of the result of the investigation depends in large measure on the credibility of the process used, including 1) the process used in-house by HR, 2) that used by outside counsel and/or investigators, and 3) in-house HR’s coordination of both internal and external processes.”

As an employer or a member of your company’s human resource or audit committee, the way in which a whistleblower situation is handled greatly impacts the image of your company. Many businesses claim that they encourage their employees to come forward and report fraud that they detect in the workplace. Encouraging employees to help you in your fight against corporate fraud is good and all, however, many companies still don’t stand behind their employees when they actually come forward with an issue of fraud.

Solutions for Employers

Employers should consider establishing hotlines or other systems that allow for anonymous employee reporting, should they uncover fraud or other workplace violations. These systems make it easier for employees to build up the courage to bring these issues forward- without having to worry about losing their job or facing other forms of retaliation. Anonymous reporting systems make it easier for your investigations team to look into these claims and stop fraud and other violations from carrying on any longer. In many cases that have made it to public attention, it was noted that the fraud schemes had been taking place for a number of years without being reported.

Early detection and reporting of fraud is what allows many businesses under investigation to salvage their reputation in the public eye. When the public is aware that there was internal knowledge of fraud and it had been going on for some time, the public backlash is likely to cripple your company. Make anonymous reporting  of fraud accessible and possible for your employees- in your company’s workplace ethics and compliance policy, address the issue of reporting fraud in the workplace. Outline the steps to anonymous reporting, include hotline or ombudsman contact information and ensure that confidentiality will be upheld to the highest degree possible.

Look into investigation systems such as i-Sight Investigation Software- it sends alerts when a new complaint or issue is made and it can be used along with your hotline system. i-Sight makes it less expensive and more efficient for conducting internal investigations and allows you to react to cases based on their ranking of importance. i-Sight is a great solution for reacting to allegations in a timely manner and tracks repeat offenders.

Think of the gutsy decision made by whistleblower Coleen Rowley- she was the one who voiced her concerns to the Director of the FBI regarding the FBI’s mishandling of the 9/11 terrorist attacks and the terrorist activity that they were aware of prior to the attacks. It takes a lot of courage to be a whistleblower. In the news, we hear about high profile scandals and wonder why no one spoke up sooner.

Due to the fact that the majority of those taking on the role of whistleblower get fired for doing so, it becomes very clear why it took so long.

In a statement made by the National Whistleblowers Centre (NWC), whistleblowers are the single most important corporate resource for detecting and preventing fraud. Whistleblowers can face serious consequences, but knowing your rights as a whistleblower can make speaking up sooner a bit easier.

What Makes the Whistle Blow?

Fraud and criminal practices are the most frequently reported cases. Other areas that receive whistleblower attention are:

• Health and safety issues
• Accounting and bank fraud
• Environmental issues
• Discrimination
• Harassment
• Medical malpractices

Rights of Whistleblowers:

In order to have your rights as a whistleblower protected, you must report the actions to a government agency or someone outside of the company- whistleblower protections do not apply for cases made internally. The legal issues surrounding whistleblowing are very complex. Before taking any action as a whistleblower, it is important that you seek legal advice. The industry you work in and the type of malpractice you plan to report play a role in determining which laws and acts you will be covered by. The purpose behind whistleblower protection laws are to allow employees to stop, report, or testify about employer actions that are illegal, unhealthy, or violate specific public policies.

Here are some of the acts that have whistleblower protections built into them:

The False Claims Act allows a private individual or “whistleblower”, with knowledge of past or present fraud on the federal government, to sue on behalf of the government to recover civil penalties and triple damages. If the suit is successful, it not only stops the dishonest conduct, but also deters similar conduct by others and may result in the receipt of a substantial share of the government’s ultimate recovery – as much as 30% of the total.

The Whistleblower Protection Act (WPA) provides statutory protections for federal employees who engage in “whistleblowing,” making a disclosure evidencing illegal or improper government activities.

Sarbanes- Oxley Section 806 also has provisions to protect whistleblowers in the case of reporting financial and accounting malpractices.

There are also many branches of the US Department of Labour that protect whistleblowers within the United States. Click here to view the different departments and your rights.

Forms of Retaliation:

Even though retaliating against a whistleblower in the workplace is illegal, the unfortunate reality is, it usually happens.

According to http://www.whistleblowerlegalrights.com/, common forms of retaliation include:

• Firing
• Demotion
• Suspension
• Job reassignment
• Decrease in work hours
• Change in work description
• Denial of future promotions
• Relocation
• Harassment, cold shoulder from others

In our posts about the Ethics Bubble, and Ethics During a Recession we highlighted this graph from the recent Ethics Reseource Centre National Business Ethics Survey.

The experts at http://www.whistleblowerlegalrights.com/ also provide some information on your legal rights if your employer does retaliate:

• You may be able to file a claim with Occupational Health and Safety Administration or state labor board officials.
• Many laws protecting whistleblowers from retaliation have statutes of limitation, meaning a 30-day filing deadline is in place.
• Consulting with a whistleblower attorney is also highly recommended.