SARBANES-OXLEY ACT 2002 -
WHISTLEBLOWER PROTECTION
AND CORPORATE EXPOSURE
HAROLD S. SMALL, J.D., CPA, and AEP
The publicity and media attention relating
to the collapse of Enron and other similar situations resulted in the enactment
of the Sarbanes-Oxley Act of 2002 (“the Act”).
It is applicable to
One area of protection for employees
relates to “whistleblowers” that now have federal protection under the Act
(effective July 30, 2002). Employees
that take lawful action to disclose information or assist criminal
investigators, federal regulators, supervisors, and or other proper persons
within a corporation or parties in legal/judicial proceedings in detecting or
stopping fraud are entitled to protection.
The protection is afforded to an employee when
he/she has a reasonable belief that a violation of federal securities laws or
rules has occurred or is occurring and reports same. Since the protections apply to publicly traded
companies and also to their officers, employees, and others, it is possible
that a claim may be made for individual liability against officers and
employees, which expands the area of potential liability. A review of insurance coverage is probably in
order and annual reviews of coverage are also appropriate.
Additionally, when an employee believes
that he/she has been the subject of illegal action in retaliation for
protecting whistle blowing activities under the Act, an aggrieved employee may
file a complaint with the Department of Labor (“DOL”). Specific requirements and timing apply to
such complaints. Where a complaint is
filed with the DOL, the possible remedies available under the Act include the
reinstatement of employment, back pay with interest, compensatory damages to
make the whistleblower whole, and attorney’s fees and costs.
A cause of action for whistleblower
protection provided for under the Act does not preempt existing state law or
protection under collective bargaining agreements, although there may be
situations now or in the future where the federal statutes may control some
areas. The importance of this area
cannot be overstated as there may be exposure (in addition to that created by
the Act) to tort actions for wrongful termination and violation of public
policy, which may permit an award of punitive damages. This is important to remember as it does not
appear that either punitive damages or a jury trial are available under the
Act.
Criminal penalties and exposure are created
by B806 and B1107 of the Act which provide for up to ten (10) years in prison
for anyone who knowingly and with the intent to retaliate takes harmful actions
against or intends to affect another.
The act also requires that public companies
provide procedures for confidential and anonymous submission of employee
concerns about accounting or auditing issues, principally through the audit
committee. The audit committee is given
significant authority under the Act relating to this area.
Record retention and maintenance policies
of companies need to be reviewed for reasonableness and they need to be updated
based upon the Act. The
policies once implemented need to be followed. The Act provides sanctions and penalties
relating to tampering with and/or destroying of documents and records. The penalties and sanctions may apply when
records are destroyed, even when the destruction occurs prior to the issuance
of any legal process. While a standard
records retention and destruction policy may be helpful, if it is unreasonable
or the company fails to follow it, there may be exposure for improper
actions. If a document retention and
destruction policy is implemented at or about the time of destruction of
records that later prove important to an investigation or legal process, the
existence of the policy will be of little benefit. Also, the existence of a policy and following
same does not provide immunity, but when it is reasonable in nature and
documents are inadvertently destroyed, it may provide some assistance. The punishment for document falsification or
destruction under B1512 of the Act may be twenty (20) years of imprisonment
and/or fines.
Employment agreement formats used by
employers need to be reviewed and revised because of the Act and other changes
in the law. Similarly, employment
agreement renewals should be viewed with a mind as to changes that may be
needed because of the Act. In addition,
employers need to review their employment practices and document retention and
destruction policies because of the adoption of the Act and the risks to
business entities. This suggestion is
not just for publicly traded companies as these are business areas that require
consideration, even in the absence of the Act applying to a particular company
that is not publicly traded. When a
company contemplates a public offering or anticipates that it may be able to go
public, it is important that consideration be given to these issues as the
business grows and expands.
Space does not allow for a full discussion
of CEO and CFO Certification requirements, nor other
provisions of the Act. Publicly traded
companies should have already been advised by their counsel relating to these
issues, and implemented appropriate procedures and actions.
THE FOREGOING
CONCEPTS AND IDEAS ARE GENERAL STATEMENTS AND ARE INTENDED TO PROVIDE CONCEPTS
FOR CONSIDERATION IN BUSINESS AND TAX PLANNING.
CAREFUL CONSIDERATION NEEDS TO BE GIVEN BY THE USER REGARDING THE USE
AND APPLICATION OF THE CONCEPTS. YOUR LEGAL AND TAX COUNSEL SHOULD BE CONSULTED BEFORE THE
IMPLEMENTATION OF ANY OF THE IDEAS INDICATED HEREIN. SHOULD YOU HAVE QUESTIONS REGARDING THIS
MATTER, HAROLD S. SMALL, ESQ., CAN BE REACHED AT
Copyright Harold S.
Small 2007. All rights reserved.