Sarbanes-Oxley Act: Impact on Auditors, Client Companies

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Transcript Sarbanes-Oxley Act: Impact on Auditors, Client Companies

Preventing Whistleblower Claims:
Lessons Learned From Another
Year of Sarbanes-Oxley
AGG Employment Law Seminar
June 10, 2004
Robert F. Dow
Arnall Golden Gregory LLP
1201 West Peachtree St., Ste. 2800
Atlanta, Georgia 30309
(404) 873-8706
[email protected]
Whistleblower Provisions
Civil remedies for retaliation against employees reporting
securities fraud to company supervisors, law enforcement or
Congress (Sec. 806)
• Criminal remedies for retaliation against informants reporting
violations of any federal law to law enforcement (Sec. 1107)
• Audit committees must establish procedures for handling
complaints about accounting and auditing issues (Sec. 301)
• Requires a code of ethics addressing compliance with laws and
internal reporting of violations (Sec. 406)
Section 806
Civil Remedies
Section 806
What Actions Are Protected
• Providing information or otherwise assisting in an
investigation OR
• Filing, testifying, participating in or otherwise assisting in a
proceeding that is
 Filed or
 About to be filed (with any knowledge of the employer)
Section 806
What Investigations Are Covered
Investigations involving violations of:
• Federal criminal law involving securities fraud, mail
fraud, bank fraud, or wire, radio and television fraud
• SEC rules or regulations; or
• Federal law relating to fraud against shareholders.
Section 806
Blowing The Whistle – To Whom?
• Federal regulatory or law enforcement agency
• Any member or committee of Congress
• Persons working for the employer:
 Supervisory authority over employee
 Authority to investigate, discover, or terminate
Procedure For
Seeking Remedies
 Complainant has 90 days after violation to file complaint
with Department of Labor (DOL)
 DOL must determine that the employee has made a
showing that the protected conduct was a contributing
factor in the employer’s action
 If so, DOL opens an investigation
Procedure For
Seeking Remedies
 DOL issues an order to either dismiss the complaint or
impose sanction
 Either party may appeal the order to an administrative
law judge
 If DOL does not resolve the complaint within 180 days,
complainant may bring a claim in federal district court
Recent Case Activity
Morefield v. Exelon Services (Jan.
• Plaintiff claims:
 Management manipulated financial reports
 Plaintiff fired when he complained
• Company claimed the employee of a non-public
subsidiary not covered by SOX
• Lessons:
 Can’t play corporate shell game to avoid liability
 No materiality limit for accounting irregularities
Welch v. Cardinal Bankshares
(Jan. 2004)
• Plaintiff claims:
 False accounting entries to inflate income
 CFO access to auditors restricted
 Too many non-finance personnel could make
accounting entries without CFO approval
• Company started an investigation into allegations
• Plaintiff terminated when he refused to meet with audit
committee without his attorney
Welch v. Cardinal Bankshares
(Jan. 2004)
• Lessons learned:
 Employee needs only reasonable belief
 Company liable even if investigation indicates
allegations were wrong
 Can’t place conditions on communications
 Protected activity only has to be a “contributing
factor” in termination
 Closeness in time may indicate that termination was
in retaliation
Hopkins v. ATK Tactical/Sys. (May
• Plaintiff claims he was fired because he complained about
release of sludge into groundwater
• Complaint dismissed because it was filed late and failed
to show a cause covered by SOX
• Lessons:
 Close attention to procedures needed
 SOX not that broad: only financial fraud
 Employee’s best shot is to show there is no legitimate
Platone v. Atlantic Coast Airlines
(April 2004)
• Plaintiff claims she was terminated because she raised
concerns about possible flight pay fraud
• Company claims plaintiff was dismissed due to her
personal relationship with a union representative/pilot
• Lessons:
 Employer must show proper motive by clear and
convincing evidence
 If dual motives can’t be separated, employer loses
Getman v. Southwest Securities, Inc.
(Feb. 2004)
• Plaintiff claims:
 Pressured to give favorable analysts’ report on SSI
 Fired when she refused to sign a “buy” rating
• Lessons:
 Refusal to sign report is “whistleblowing”
 Company can’t suddenly decide that this is a bad
employee after protected conduct
Whitley v. Coca-Cola (Oct. 2003)
• Plaintiff claims he was fired for raising issues about
Coke’s fountain unit and Burger King
• Settled for $540k: $240k to plaintiff and $300k to his
• Coke also wrote down $9 million in assets, and continues
to be under an SEC investigation
Halloum v. Intel Corp. (Mar. 2004)
• Plaintiff claims the company retaliated for his complaints
about improper deferral of invoices by placing more
stringent requirements on him
• Company was able to establish that it would have taken
these actions, regardless of the complaints, due to
plaintiff’s poor performance and violations of policy
• Lesson: Timely documentation of employee performance
is key to defending whistleblower claims
Murray v. TXU Corp. et al.
(Texas, April 2003)
• Allegations in Murray’s complaint:
 TXU had aggressive earnings targets
 CFO engaged in “earnings management”
 TXU didn’t disclose exposures in trading markets
 Murray made numerous objections to management
• Murray was terminated 8/1/02
Collins v. Beazer Homes
(Georgia, May 2003)
• Allegations from Collins:
 Beazer was taking deposits on homes but misapplying
the funds for other purposes
 Collins suspected that Beazer division management was
receiving kickbacks from a contractor
 Collins complained to corporate management
 Division management immediately terminated her
Section 1107
Criminal Penalties
Section 1107
Criminal Penalties – Overview
• Very broad application
• Applies to public and private companies
• Whistleblowing of violations of any federal law
• Employers and their agents may face:
 Fines up to $500,000 ($250,000 for individuals)
 Imprisonment up to 10 years
Federal Sentencing
Guidelines Reward
“Effective Compliance Program”
• Compliance standards and procedures reasonably capable
of reducing the prospect of criminal activity
• Oversight by high-level personnel
• Due care in delegating substantial discretionary authority
• Effective communication to all levels of employees
Federal Sentencing Guidelines
“Effective Compliance Program”
• Reasonable steps to achieve compliance, which include
systems for monitoring, auditing, and reporting suspected
wrongdoing without fear of reprisal
• Consistent enforcement of compliance standards including
disciplinary mechanisms
• Reasonable steps to respond to and prevent further similar
offenses upon detection of a violation
Jan. 2004 Amendment to
Sentencing Guidelines
• Reporting system must encourage employees to seek
guidance regarding potential criminal conduct without fear
of retribution
• System to periodically evaluate compliance program’s
effectiveness in:
 Preventing and detecting criminal activity
 Promoting a culture that encourages a commitment to
compliance with law
• Compliance training programs for directors, senior
management and personnel with substantial authority
Section 301
Audit Committee Requirements for
Complaint Procedures
Procedures for Handling
Complaints Regarding Accounting
The SEC rules require the audit committee to establish procedures
• Receipt, retention, and treatment of complaints
• Regarding accounting, internal accounting controls or
auditing matters
• Including procedures for the confidential, anonymous
submission by employees of concerns regarding
questionable accounting or auditing matters
Section 301
Effective Dates
• Rule became effective 4/25/03
• Applies to all companies listed on national securities
exchange or association (NYSE, AMEX, Nasdaq, etc.)
• Most listed companies must comply by the earlier of:
 First annual meeting after 1/15/04 or
 10/31/04e until 7/31/05
Survey by Deloitte & Touche
(July 2003)
(Top 4000 public companies)
79% - have a hotline or other mechanism to report ethics issues
- 90% of those have anonymous reporting
- 40% report results at least quarterly to Board of Directors
67% - have training on ethics and compliance