| Don’t Be Afraid to Whistle | | | Dmitry Lepenkov 1087106 708 Lakeside Circle Dr.Wheeling, IL 60090dmitrylep@gmail.com 224-595-3964 | 11/16/2010 |

The recent subprime meltdown and the economic crisis that followed have wielded few successfully prosecuted cases of fraud in the financial sector. This can partly be explained by the complex nature of the financial instruments that were used, which are hard for regulators to decipher and for judges to interpret whether any fraud occurred. It seems that the missing ingredient in most prosecutions has been the absence of any forthcoming information from insiders. Whistle blowing has been almost nonexistent during the run up to the financial crisis and its aftermath. This is reflective of the negative stigma that is associated with whistle blowing in most businesses and corporations. Combined with a culture of silence that is prevalent in the finance and accounting industries this is not a big surprise. Federal regulators and congress have been encouraging whistleblowers to step up in recent years, however more must be done. Regulators must continue to improve protection and incentives for whistleblowers to come forward. In addition corporate culture must change in its negative view of whistle blowing. Most importantly though professionals, especially accountants must understand that they are serving the public interest and thus must step up and reveal any fraudulent or unethical activities that hurt the public. Whistle blowing is hard to encourage and federal authorities have been doing terrible job of it until recently. The trend has been changing, first with the passing of the Sarbanes-Oxley Act in 2002 that included a provision for expanded whistle blower protection. The act made it legal for public companies to fire employees that reported any illegal activities in which a firm or its employees engaged in (Siegel). It is a pretty common occurrence for firms to fire employees that reported illegal activities whether to the firm’s management or to federal regulators. Management typically does not want to acknowledge that they have anything illegal or unethical going on in their department or company. Getting rid of the employee that reports such occurrences would seem like a convenient way of sweeping the problem under a rug. Before this act whistleblowers had to rely on a myriad of state laws that differed from state to state in their protection against termination or other retribution by the company (Siegel). In the case that an employee is deemed to be wrongfully terminated the employer can be subject to both civil and criminal penalties (Siegel). The civil penalty can involve damages awarded to the terminated employees such as back pay and lawyer fees. In some cases the court can force employers to reinstate the terminated employee. Yet, most companies would rather fight in court for months than hire back someone that they consider to be a traitor (Wyatt). Cases against employers usually last a very long time with huge emotional and financial hardships for whistle blowers (Wyatte). One can imagine how hard it would be to work in an environment where the employer was forced to hire you back and would do everything possible to make you quit. Most cases never actually go to court as employers would settle or the fired employee may not have sufficient evidence to prove that the reason for dismissal was due to whistle blowing (Wyatte). To start proceedings employees would have to file a complaint with the department of Labor (OSHA). Most often OSHA dismisses complaints due to lack of sufficient evidence, thus an employee never even gets a chance to sue the company in court (“Sweeping”). This is one of the major downsides of the Sarbanes-Oxley act and the current whistleblower protection laws in general. The burden of proof is mostly on shoulders of the employee which greatly diminishes the chance of a successful lawsuit. This is especially true for low profile internal complaints that may get an employee fired, but are really hard to prove as the basis of termination. To make the reporting process anonymous and thus encourage whistle blowing Sarbanes-Oxley required the company’s audit committee to create a confidential way in which employees can report any “questionable accounting or auditing matters” (Siegel). This offered more protection to whistle blowers especially on smaller internal company matters. It would save employees from getting ostracized by fellow peers and singled out by management. Whistleblower protection has recently been strengthened by the passage of the Dodd-Frank Act. It is now much easier for employees to file lawsuits against companies for wrongful termination as there is no longer the need to go through OSHA. Whistleblowers can file a lawsuit directly through a federal district court and bypass all the OSHA bureaucracy in the process (“Sweeping”). The statute of limitations also gets extended dramatically from 90 days to 10 years since the violation, giving employees a much longer time span to file lawsuits (‘Sweeping”). Still, however it is a daunting task to wage a successful lawsuit against companies who usually have an army of lawyers at their disposal. Another significant provision in the act allows the Securities Exchange Commission to create a $451 million fund which can be used to reward whistleblowers. Potentially the rewards can be huge, with the law requiring payments to tipsters of 10 to 30% of penalties above $1 million collected by the S.EC. (Wyatte). For example, if the law was in effect when the S.E.C. settled with Goldman Sachs for $550 million, a tipster could have received a reward of up to $165 million (Wyatte). This reward however is not available to everyone, people whose duty is to find fraud, such as internal auditors are exempt (“Sweeping”). Of course like the Sarbanes-Oxley Act most of the whistleblower provisions of the Dodd-Frank act only apply to public companies and their employees. The addition of potential big rewards and further protection has created a better environment for whistle blowing. Yet, there is only so much laws and regulations can achieve. The real obstacle to whistle blowing is the corporate stigma regarding the subject and each professional’s moral beliefs or lack there off. In some companies corporate culture is one of the main obstacles to employees speaking up against fraud or unethical behavior. This is true in the finance industry, particularly investment banking where employees are well compensated and there is a culture of silence and secrecy (Wyatte). Office politics often play a big part in determining whether speaking up against unethical and illegal behavior is an excepted or an admonished action in the company. This is made clear by upper management and the internal compliance departments. When the compliance department is weak and management doesn’t want anyone to get a wind of bad practices inside the firm then the probability of employees speaking up is low. In such companies it is much more likely that employees will get terminated or punished in some other way for speaking up. While some might view whistleblowers as martyrs or heroes standing up for what is right, other view them as traitors and disloyal employees. Thus, if the identity of a whistleblower is found out, which more often than not it is, this person might be avoided by fellow peers and not trusted by management to handle key tasks (Wyatte). The workplace will become hostile and unwelcoming to that person, sometimes resulting in the employee quitting by themselves. It is not like this at most firms though. Companies that have strong compliance departments, and genuinely welcoming and concerned management encourage employees to step up and say when there is something illegal or unethical happening in the company. In such firms the culture is much more open to whistle blowing and employees are not as afraid to speak out. The major part in such culture is of course the moral beliefs of employees and management. There were a lot of unethical and illegal practices in the run up to the financial crisis. Many professionals became blinded by greed and the “me ahead of everyone else mentality”. Even those few professionals that questioned the ethical and legal nature of some corporate practices kept quite, as the financial rewards were too great. It seems that accountants especially have forgotten that they have a duty not only to their client but also to the general public. That duty of course is to make sure no unethical or illegal acts are committed on their watch which may harm stock holders or anyone else related to the company in some way. Every accountant knows from accounting classes or the CPA exam the ethical guidelines of their profession. It is the duty of every accountant to speak up when they discover some questionable practice that may harm the public or the company. It is not surprising that when the financial crisis un-winded and numerous cases of fraud became public that the S.E.C was caught off guard. There were very few whistleblowers that tipped off the authorities before the financial crisis. By themselves, the S.E.C. and other regulators were not adept at finding some of the more complicated fraud schemes perpetrated in the financial sector. Authorities understood that to encourage whistle blowing there was a need for more protection and incentives. This culminated in the Dodd-Frank Act and the setting up of large reward fund for tipsters. Regulators by themselves however, cannot change the corporate culture that generally looks down upon whistle blowing. This culture must change from within, first with the strengthening of compliance departments and secondly with management that must understand that internal whistle blowing can only be good for the company. As fraud can be so damaging to a firm, it is best to root it out before it spreads and gets out of hand. Professionals, especially accountants at the same time must not be afraid of speaking out and doing what they feel is right. Everyone has a moral compass, it is just a question of whether to follow that guidance or simply ignore it. The latter is a path down a slippery slope that no professional should venture on.

Works Cited
Siegel, Paul J. “Sarbanes-Oxley Act of 2002: Expanded Whistleblower Protection.” IRMI.com. November 2002. <http://www.irmi.com/expert/articles/2002/siegel11.aspx>
“Sweeping New Whistleblower Incentives and Protections in Financial Reform Bill.” Orrick.com 21 July, 2010. <http://www.orrick.com/fileupload/2832.htm>
Wyatte, Edward. “For Whistle-Blowers, Expanded Incentives.” The New York Times. 14 November, 2010. P. B1.
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