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.
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.