Transcript The Enforcement of Ethics:

The Enforcement of Ethics:
An Update on the Federal Sentencing Guidelines and
Ethics Office Requirements
Charles R. McGuire, J.D.
Illinois State University
Legal Requirements for Ethics
Programs:
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Federal Sentencing Guidelines (1991)
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First to require formal company-wide Ethics
Programs
Results in reduction of fines and penalties
Resulted in creation of Ethics Offices in companies
Resulted in explosion of Ethics Training
Resulted in explosion of Ethics Consultants
Applies to FEDERAL law only
Legal Requirements for Ethics
Programs
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Sarbanes-Oxley Act of 2002
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Requires certification of financial reports by
top executives
Increases penalties and prison terms for
fraud
Establishes new regulations
Requires new reports to the SEC
Requires disclosure of Ethics Codes
Federal Sentencing Guidelines
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United States Sentencing Commission
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An ongoing independent agency created in 1984
Establishes sentencing policies and practices for
the federal courts
7 members, appointed by the President
Purpose in part was to “structure the previously
unfettered discretion of federal trial judges” and to
“target white collar and violent, repeat offenders”
for more serious penalties.
U.S. v. Missouri Valley Constr.
Co., (8th Cir., 1984) (Healey, J.)
“The present practice of punishing
corporate crime with fines paid to the U.S.
Treasury has done little to deter corporate
crime. Once the payment is made, the
public promptly forgets the transgression,
and the corporation continues on its way,
with its reputation only slightly tarnished by
what it usually describes as a “highly
technical violation”
Organizational Sentencing
Guidelines
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Most commonly apply to fraud, environmental waste
discharge, tax offenses, and food and drug violations
Criminal liability can attach whenever an employee
commits an act within the apparent scope of
employment, even if directly contrary to company
policy and instructions.
Sentencing Guidelines incorporate preventative and
deterrent aspects of “systematic compliance
programs”
Sentencing Guidelines mitigate the potential fine
range – up to 95% in some cases – if there is “an
effective compliance program.”
“Aggravators and Mitigators”
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Mitigators
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Effective program to prevent and deter violations
of Law
Self-reporting
Cooperation with authorities
Acceptance of responsibility
Aggravators
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Involvement or tolerance of activity
Prior history
Violation of an order
Obstruction of Justice
Seven Criteria for An “Effective
Compliance Program”
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Compliance Standards and Procedures
Oversight by high-level personnel
Due Care in delegating substantial discretionary
authority
Effective communication to all levels
Reasonable steps to achieve compliance, including
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
Usual Components of an
“Effective Compliance Program”
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An Ethics Code
An Ethics Office, including high-level
oversight
An Ethics Training Program
A “hot line” or “tip line”
Audit and compliance reporting
Ethics Codes: Best Practices
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Best when broad based;
No “one size fits all”
Should be continually reevaluated and
rewritten (the “dusty and musty” problem)
Should evidence high-level commitment;
Should not be done entirely by either the
lawyers (compliance) the accountants (audit)
or the security group (internal security) but
by all
Ethics Offices: Best Practices
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Need to be high-level (V.P.) with access to
top management
Must be beyond reproach
Must be totally confidential
Must have internal investigatory powers at all
levels
Should have an advocacy function within the
company
Should be responsible for reporting
Ethics Training Programs Best
Practices
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Involve all levels and employees of
corporation
Based on Ethics Code
Involve a variety of internal programs and
multiple delivery mechanisms
Should be strategic, rather than “canned”
Should aim at awareness, knowledge and
skill-building, and reinforcement
Hot Line/Tip Line Best
Practices
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“Customers or Employees or both?”
Confidentiality, confidentiality,
confidentiality…. And security.
The problem of the anonymous
informant
No retribution against whistleblowers
Audit and Compliance
Reporting Best Practices
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Done by (or under the authority of) the
Ethics Office
Include positives: Employee/customer
surveys, customer satisfaction indices,
trend lines, etc.
Make public
Impact of the Sentencing
Guidelines:
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500 Law Review Articles and 300 newspaper
articles;
300 websites dealing with guidelines
18,381 articles on compliance programs;
Created new job description: The Ethics
Officer
EOA: 750 Members. www.eoa.org
53% of those surveyed by EOA reported that
the Guidelines had “a lot of influence” on
their decision to adopt a compliance program.
The CareMark Decision
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Delaware Decision, 1996, a civil action for breach of fiduciary
duties resulting from kickbacks and false claims
The Caremark decision expanded liability for board members
and said that a corporate director has “a good faith duty” to see
that ethics information and reporting systems are established in
the organization.
Failure to assure that a corporate reporting and information
system exists may render a director liable for losses causes by
non-compliance
Court examined the compliance program and found that the
directors would not be held liable SINCE AN EFFECTIVE
COMPLIANCE PROGRAM WAS IN PLACE.
The decision has been cited numerous times in other cases.
Sarbanes-Oxley Act of 2002
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Amendment to 1934 Securities
Exchange Act
Passed to help bolster investor
confidence following several corporate
collapses
Provided for additional SEC rules to
interpret and enforce the Act
Key Provisions of SarbanesOxley
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Established Public Company Accounting Oversight
Board
Prohibited registered firms doing an audit from nonaudit services, including consulting
Required sign-off by CEO and CFO to certify
appropriateness of financial statements
Required each annual report to contain an “internal
control report”, which requires an “internal control
structure.”
Requires disclosure of whether the firm has adopted
a Code of Ethics, and rules require that the Code be
filed with the annual report
SEC Definition of a “Code of
Ethics”
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Written standards that are reasonably
designed to deter wrongdoing and promote:
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Honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of
interest…
Full, fair, accurate, timely and understandable
disclosure in reports….
Compliance with applicable governmental laws…
The prompt internal reporting …of violations of the
code…
Accountability for adherence to the code.
EOA Survey -- 2000
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Average number of contacts/year = 371
Full-Time Ethics Officer: 525
Average number of investigations/year = 59
Most Frequent contact categories (in rank order):
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Conflict of interest
Misuse of resources
Discrimination
Outside business activities
Gifts and gratuities
Sexual harassment
Summary and Questions
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The Sentencing Guidelines and
Sarbanes-Oxley should be read together
Ethics development must be an ongoing
commitment
Ethics needs to be infused throughout
the organization
The climate for ethics is strong… but
cyclical.