Blowing the Whistle

By Ed Silverman

In response to the Sarbanes-Oxley Act, employers are seeking new ways to better serve workers with something critical to say.

Call it the workplace equivalent to Batman’s Batphone. Ever since the controversial Sarbanes-Oxley Act became law in mid-2002, scores of companies have been instituting hotlines as primary tools for employees to report financial and corporate fraud. The law is complex, costly and time-consuming, but the implications are clear—the whistleblower has a legitimate place in corporate America.

“The law is pretty prescriptive because it recommends employers provide some type of mechanism for employees to raise issues,” says Sherie Tiernan, human resource director for EnPro Industries Inc., a Charlotte, N.C., industrial manufacturer with 4,300 employees that was spun off from Goodrich Corp. nearly two years ago.

So about six months ago, EnPro joined the rush and inaugurated its own hotline. So far, the anonymous reporting system, as hotlines are sometimes called, has yielded several reports, although nothing that Tiernan would describe as major. Even so, the calls are logged and later shown to the board’s audit committee for review.

Such is the new reality in a world where corporate misdeeds show up regularly on the evening news and the debate over corporate governance is a full-blown crisis for the business community. Congress has labored as well to make it clear to businesses that employees should feel reassured whistleblowing will not only yield tangible results, but also will not generate career-altering retaliation.

In addition, the U.S. Office of Special Counsel—an independent investigative and prosecutorial agency charged with safeguarding employees from prohibited practices in federal employment, especially from retaliation for whistleblowing—recently launched an efiling system to make it easier and faster to file complaints about prohibited personnel practices and whistleblower disclosures.

In response to this increased attention to the rights of whistleblowers, corporate boards and auditors are paying much more attention to the issue. And in turn, companies are boosting their compliance staffs, Jim Sheehan, an assistant U.S. attorney in Philadelphia who has relied on whistleblowers in fraud cases, told a crowd of health-care attorneys at a recent compliance conference in Washington.

“In our case, the audit committee from our board gets the reports,” says EnPro’s Tiernan. “The chairman does want to look at the ethics hotline activity and reports, and how we respond to each complaint. The board really wants summary data. This is getting much more visibility at the board level than ever before.”

As a result, human resource leaders are under the gun to ensure their companies comply with the new law which, among other things, requires that employees are provided anonymity when reporting allegations of corporate or accounting irregularities, if not outright fraud.

Gone are the days when an open-door policy or an ombudsman were considered progressive. Or a post office box number would suffice. Or attempting to maintain good relations with a union representative. All of these approaches are still worthwhile, but don’t go far enough, according to the new law.

“The law is just the latest chapter in corporate culture. It’s an outgrowth of all the problems we’ve been reading about,” says Tony Malone, chief executive of The Network Inc., a firm in Norcross, Ga., that consults with companies on ethics and security issues. “But businesses have to respond.”

The key, of course, is ensuring anonymity.

Protecting Resources

There are some important reasons, and not just because the Sarbanes-Oxley Act requires this stipulation.

Consider that a 2002 poll by the Association of Certified Fraud Examiners, a trade group for auditors, attorneys and security specialists, found that employee tips provided more leads in detecting fraud—26.3 percent—than any other information source.

The next best sources were accidental disclosures, clocking in at 18.8 percent. Internal audits and controls generated 18.6 percent and 15.4 percent, respectively. Tips from customers and vendors accounted for 13.7 percent of the tips, while external audits yielded 11.5 percent. At the bottom of the list were notices from law enforcement, at just 1.7 percent.

In other words, employees are the most valuable resources for companies when it comes to spotting most any form of malfeasance. Yet the same survey also found that anonymous tips generated just 6.2 percent of the leads. At first blush, this may indicate anonymous tips don’t yield very much useful information and/or few anonymous tips are logged.

Experts, however, argue otherwise. Rather than suggest anonymity isn’t important, this survey finding actually underscores something long known among prosecutors, attorneys and workplace specialists—providing and sustaining anonymity is very problematic for both employers and employees.

And there’s probably a good reason for that, according to the experts.

Despite the increased reliance by the federal government on whistleblowers in recent years, employees continue to fear retribution or retaliation from their employers for reporting problems about their own colleagues or supervisors. And their concern extends to whether the issue is fraud, discrimination or ethics in the workplace.

Not every whistleblower is celebrated like Enron Vice President Sherron Watkins, who helped expose her company’s financial escapades and now appears on television talk shows. Moreover, as The Network’s Malone points out, most companies don’t offer rewards for blowing the whistle. And winning money after filing a whistleblower lawsuit is still a long shot, according to legal experts.

In other words, there may be little or no upside to whistleblowing, but a great potential for substantial harm.

A recent poll, for instance, found that 51 percent of employees would file a report about wrongdoing, regardless of who collected the information. However, 37 percent of employees would not report a corporate or accounting misdeed unless a third party received the information. And another 11 percent would still not report anything due to confidentiality concerns. Looked at this way, it would be safe to extrapolate that nearly half of employees don’t want to get involved.

“This tells us that many employees continue to worry about the ramifications of blowing the whistle,” says Richard Chaifetz, chief executive at ComPsych Corp., an employee assistance provider based in Chicago that conducted the survey. “They have this fear and it’s not going away.”

Why? Well, for one, more than 50 percent of whistleblowers have suffered “serious” retaliation on an historical basis, according to The Network’s Marian Exall, the firm’s corporate counsel.

In a rather cautionary essay, she notes that human resource departments must play a crucial role in creating an environment in which employees believe they can communicate safely.

As she describes it, this calls for a change in corporate culture.

While it may be necessary to make it possible for employees to communicate openly, companies also have an opportunity to improve their communications to employees. This can take various forms, writes Exall, including updating employee handbooks and establishing appropriate procedures for conveying reports.

She also notes that, once reports are collected, a company should do its best to distinguish between financial irregularities, which are supposed to be forwarded to an audit committee, and other alleged infractions. One suggestion she makes is to route other types of complaints to a loss-prevention department or employee relations, as the case may be.

Setting Up the System

Whatever path is taken, it can be a tricky task to design the appropriate mechanism for employees to report incidents anonymously—and in sufficient detail.

After all, corporate boards not only want, but need, specific information about misdeeds that are reported.

A failure to act may have consequences — financial risk and, in some cases, criminal liability.

Not surprisingly, the law is creating a field day for consultants—and would be consultants—who would like to provide companies with software and phone banks for toll-free numbers.

But as Roger Raber of the National Association of Corporate Directors told The Wall Street Journal, “I think there should be some red flags out there.”

Nevertheless, while the legislation may have created a cottage industry for such organizations, that doesn’t mean corporate America is having an easy time dealing with compliance issues.

Experts say that enticing employees to provide enough useful information isn’t as simple as creating a toll-free number and advertising the hotline on company bulletin boards or in newsletters.

“For any company, but especially the large ones, this is not something to mess around with,” says ComPsych’s Chaifetz.

“This is a lot more complicated than it looks. And it will require a lot more teasing out over time. As an HR professional, you have the ultimate authority to see that your organization runs properly. If you don’t, the ramifications are deep and severe.”

As corporate scandals and accounting misdeeds began unnerving boardrooms following the bursting of the Internet bubble, more companies started to run their own ethics hotlines.

Now, though, more than half of the Fortune 1000 corporations outsource this function to third-party providers, according to The Network’s Malone.

As he sees it, this activity is not a “core competency” for a human resource department, which may lack the training to properly provide confidentiality and follow-up.

But even human resource professionals are conflicted, Malone maintains, because they suddenly find themselves in the uncomfortable position of knowing about a particular incident and realizing they will have to act on it.

To illustrate his point, he says, his firm finds that about 40 percent of the calls placed by a client’s employees are made during the evening or weekend.

The timing suggests a subtle but important wrinkle—employees are more comfortable speaking at a time when a human resource department is unlikely to staff a special hotline for fraud complaints.

Unlike many other activities, though, compliance isn’t an option. And whether a human resource department somehow fashions an acceptable whistleblower mechanism on its own or hires an outside firm, there’s going to be an expense.

Of course, this is one expense that doesn’t have to be sold to upper management or the board. But it’s still costly.

For instance, Malone charges up to 75 cents per employee to set up a hotline at companies with 10,000 or more employees. For smaller companies, the same service ranges anywhere from $1 to $1.50 for each employee. And this does not include the additional systems, audit and legal costs that come with compliance.

Hiring an outside consultant to set up and maintain a complaint line and prepare reports doesn’t mean the human resource department at an organization isn’t involved with the effort at all.

For one thing, HR remains the liaison to the consultant and must work closely to monitor activity and shape follow-up procedures for dealing with complaints.

And as EnPro’s Tiernan notes, a company’s board wants to know what those reports contain, since the Sarbanes-Oxley Act obligates boards to respond to malfeasance. In other words, the human resource department is on the spot—collecting, reviewing, summarizing and then acting. And then still remaining hands-on.

“We split it up so that we have two people responding to and looking at each complaint,” says Tiernan. “There’s the director of internal audit, and then there’s me.

“We went with a third party because, administratively, it’s easier. And we want employees to go to a third party. If you can’t afford that, just do it in-house,” she says.

“But make sure,” she adds, “that you’ve taken all the necessary precautions to ensure that the information is held in [strictest] confidence.”

Reprinted from HUMAN RESOURCE EXECUTIVE, March 16th, 2004 - Copyright © 2004. All rights reserved.