Whistleblowing and Sarbanes-Oxley

Lulu Rodriguez-King

LEG 500 – Law, Ethics, and Corporate Governance
Strayer University
Prof. Karina Arzumanova
January 25, 2015

Whistleblowing and Sarbanes-Oxley A whistleblower is a person who exposes misconduct, alleged dishonest or illegal activity occurring in an organization. Whistle blowing empowers workers to speak up for principles and ethics and shine a light on unethical practices that can cause negative consequences for consumers, citizens and colleagues. Internal whistle blowing can be very valuable for an organization; reports of misconduct, given early and taken seriously, can avert disaster. Alternately, public whistle blowing has toppled and shamed many organization. Research finds that employees who are female, employees who are more satisfied with their jobs, and employees with longer tenure are somewhat more likely to say that they have reported observed misconduct. A supportive climate for whistle blowing is associated with both intentions to report and actual reporting behavior. Many internal whistleblowers fear retaliation from within their organizations for whistleblowing. Retaliation deters future whistleblowers; therefore, organizations need to design systems to both protect reporters and punish retaliators (Trevino).
Recent Example of Whistleblowing While working as Director of Technical Accounting Research and Training in the Finance and Accounting department at Halliburton, Anthony Menendez raised concerns internally about questionable accounting practices. In particular, Menendez disclosed to his supervisor his belief that Halliburton’s practices involving revenue recognition did not conform with generally accepted accounting principles. Menendez’s supervisor initially responded by telling Menendez that he was not a “team player” and should try harder to work with colleagues to resolve accounting issues. After Halliburton failed to address his concerns, Menendez filed a confidential disclosure with the Securities Exchange Commission (SEC) about Halliburton’s accounting practices. In addition, Menendez sent a memo to Halliburton’s Board of Directors raising the same issues he disclosed to the SEC, and that memo was forwarded to Halliburton’s general counsel. When Halliburton received a notice of investigation from the SEC requiring Halliburton to retain documents, Halliburton’s counsel inferred from Menendez’s internal disclosures that he was the source of the SEC inquiry. Subsequently, an email was sent to Menendez’s colleagues instructing them to retain certain documents because “the SEC has opened an inquiry into the allegations of Mr. Menendez.” After the email, Menendez’s colleagues began treating him differently, refusing to work and associate with him.
Was the Whistleblower Justified Employees may be morally justified to blow the whistle under the following conditions: 1. When the firm through a policy or product will commit serious and substantial harm to the public (as consumers or bystanders), the employee should report the firm. 2. When the employee identifies a serious threat to those who may be harmed, he or she should report it and state his or her moral concern. 3. When the employee’s direct supervisor does not act, the employee should use the internal procedures and chain of command up to the board of directors. 4. The employee must have documented evidence that is convincing to a reasonable, impartial observer that his or her view of the situation is accurate and that the firms’ practice, product, or policy seriously threatens and puts in danger the public and/or product user. 5. The employee must have valid reasons to believe that revealing the wrongdoing to the public will result in the necessary changes to remedy the situation. The chance of succeeding must be equal to the risk and danger the employee takes to blow the whistle. (Josephson)
Based on the facts of the Halliburton case, Mr. Menendez was justified in whistleblowing as there was an action occurring that would substantially harm stockholders, his direct employee failed to respond when notified and notified other internal parties including the Board of Directors, he had documented evidence, and believed that reporting the condition would cause Halliburton to take corrective actions.
Protection Under Sarbanes-Oxley Under Section 806 of the Sarbanes-Oxley Act, whistleblowers are protected for providing information about securities fraud, shareholder fraud, bank fraud, a violation of any SEC rule or regulation, mail fraud, or wire fraud. An employee need not show that an actual violation occurred so long as the employee reasonably believes that the violation is likely to happen. The whistleblower protection provisions of the Sarbanes-Oxley Act prohibit a broad range of retaliatory adverse employment actions, including discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against a whistleblower. In this case, the main issue was whether Menendez suffered an “adverse action” when Halliburton disclosed his identity as a whistleblower. Halliburton’s outing of a whistleblower to his colleagues and informing them that the whistleblower caused them to be the subject of an SEC investigation “created an environment of ostracism” for the whistleblower, which might dissuade a reasonable employee from whistleblowing therefore constituting a SOX violation.

References
Trevino, L. (Ed.). (n.d.). Whistle Blowing | Ethical Systems. Retrieved January 26, 2015, from http://ethicalsystems.org/content/whistle-blowing
Zuckerman, J. (2014, November 13). Fifth Circuit Holds that. Retrieved January 26, 2015, from http://www.zuckermanlaw.com/circuit-holds-outing-whistleblower-adverse-action-sox/
Josephson, M. (2011, March 22). When is Whistle-Blowing Morally Justified? Retrieved January 26, 2015, from http://josephsoninstitute.org/business/blog/2011/03/when-is-whistle-blowing-morally-justified/