Whistleblower Protections under SOX

Valerie J. Watnick wrote an interesting paper titled, “Whistleblower Protections under the Sarbanes-Oxley Act: A Primer and a Critique.”  Check it out.  The following abstract comes from bepress Legal Repository:

In the wake of scandals involving Enron Corporation, Arthur Andersen and other corporations, Congress enacted the landmark Sarbanes-Oxley Act of 2002, the Corporate and Criminal Fraud Accountability Act of 2002 (hereinafter the “Act” or “Sarbanes-Oxley”).This article critically examines the whistleblower protections afforded employees under Sarbanes-Oxley. Part I of the article considers the statutory language, the legislative history, and the regulations pursuant to the Act. Part II of the article examines recent decisions by the U.S. Department of Labor in Sarbanes-Oxley whistleblower cases (cases under the Act are initially adjudicated by the Department of Labor) and the overall framework for implementation of the law. The manner in which Sarbanes-Oxley relates to state law, particularly the doctrine of at-will employment, is discussed in Part III. In Part IV, the breadth and effectiveness of the Sarbanes-Oxley whistleblower protections and the existing legal and corporate cultural framework is considered. Finally, Part V proposes suggestions for improving current whistleblower protections under Sarbanes-Oxley so that they will accomplish their intended legislative purposes: that of protecting and encouraging corporate whistleblowers. Normatively, it appears that meaningful changes must occur on three levels to protect and encourage whistleblowers to “whistle” early on and to thereby prevent corporate fraud: i) there must be more exacting implementation of the existing Sarbanes-Oxley regulations; ii) administrative tribunals and courts must give effect to the intent of the statute: to actually protect whistleblowers; and iii) years after the “Enron wake-up call,” public companies must still reform their business cultures to encourage the free flow of information and reporting of wrongdoing. Whistleblower protection is a critical part of Sarbanes-Oxley and fraud prevention. Loyal employees with information to report about their corporate employer will only come forward readily – to protect investors and individual shareholders against corporate fraud – when they believe that their livelihoods will be protected in an immediate and real way. Only when all employees are watching – and no one is afraid to blow the whistle – will the incidence of fraud in public corporations drop to an acceptable level. 

Sarbanes-Oxley is good?

If you caught the April issue of the Harvard Business Review you might have stumbled across an aticle titled, “The Unexpected Benefits of Sarbanes-Oxley.“  Turns out SOX is helping companies:

• strengthened control environment
• more reliable documentation
• better, less burdensome compliance with other statutory regimes
• more standardized processes for IT and other functions
• reduced complexity of organizational processes
• better internal controls within partner companies
• more effective use of both automated and manual controls
• increased audit committee involvement

Who knew; via John Walz at Sarbanes-Oxley Blog.

Sometimes more is less!

Frank Buytendijk at Gartner reminds us that sometimes more corporate regulations lead to less (not more) corporate transparency:

Royal Dutch/Shell Oil yesterday announced its annual results. It also decided not to report predictions anymore on future oil production and on anticipated return on average capital employed. Although that’s valuable information, the company decided to stop the practice because while the predictions come true in the long term (or so they claim), on an annual basis, they were too “volatile.”

I think there have been many examples the last six months of CEOs, accompanied by their chief corporate counsel, disclosing less nonfinancial information instead of more. I’m currently in a fact-finding mode to see a pattern exists. According to this article in CFO magazine, a survey of 600 investor-relations executives revealed that nearly a third said their employers are considering ending the practice of offering profit projections to Wall Street analysts. Stay tuned …

Sarbanes-Oxley = increased directors fees

Sarbanes-Oxley (SOX) has turned corporate governance on its head, changing the way companies select auditing firms, assess internal controls and conflicts of interest.  More and more board members are saying no to new board appointments.  When they do agree to join the fees they demand are significantly higher.

Recent studies are confirming this trend.  Typical compensation ranges from $20,000 to $200,000 per year depending on size of the company and the members responsibilities.  Compensation is also getting more complex including aspects such as:

• Basic retainer (plus per-meeting fees, telephonic meeting fees and committee fees)
• Life insurance, health plans, stock option plans and D&O insurance

Audit Committee Requirements

Does your audit committee have a charter? If so does it address these responsibilities?

• How financial statements are prepared and presented?
• Which accounting firm will audit financials?
• What system of internal controls will be used?
• Who will monitor compliance with laws and regulations?
• Who will be responsible for SEC compliance?

[via Theodore F. di Stefano]

Sarbanes-Oxley Act of 2002

Wikipedia describes the Sarbanes-Oxley Act of 2002 (Pub. L. No. 107-204, 116 Stat. 745, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or SarbOx; July 30, 2002) is a United States federal law passed in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, and WorldCom (now MCI). These scandals resulted in a decline of public trust in accounting and reporting practices. Named after sponsors Senator Paul Sarbanes (DMd.) and Representative Michael G. Oxley (ROh.), the Act was approved by the House by a vote of 423-3 and by the Senate 99-0. The legislation is wide ranging and establishes new or enhanced standards for all U.S. public company Boards, Management, and public accounting firms. The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. Some believe the legislation was necessary and useful, others believe it does more economic damage than it prevents and yet others observe how essentially modest the Act is compared to the heavy rhetoric accompanying it.

[via Wikipedia]

Sarbanes-Oxley Act History

The history of the act is fairly interesting.  The House passed Rep. Oxley’s bill (H.R. 3763) on April 25, 2002, by a vote of 334 to 90. The House then referred the “Corporate and Auditing Accountability, Responsibility, and Transparency Act” or “CAARTA” to the Senate Banking Committee with the support of President Bush and the SEC. At the time, however, the Chairman of that Committee, Senator Paul Sarbanes (D-MD), was preparing his own proposal, Senate Bill 2673.Senator Sarbanes’s bill passed the Senate Banking Committee on June 18, 2002, by a vote of seventeen to four. On June 25, 2002, WorldCom revealed that it had overstated its earnings by more than $3.8 billion during the past five quarters, primarily by improperly accounting for its operating costs. Senator Sarbanes introduced Senate Bill 2673 to the full Senate that very same day and it passed 97 to 0 less than three weeks later on July 15, 2002.

The House and the Senate formed a Conference Committee to reconcile the differences between Senator Sarbanes’s bill (S. 2673) and Representative Oxley’s bill (H.R. 3763). The conference committee relied heavily on Senate Bill 2673 and most changes made by the conference committee strengthened the prescriptions of S. 2673 or added new prescriptions.? (John T. Bostelman, The Sarbanes-Oxley Deskbook § 2-31.)

The Committee approved the final conference bill on July 24, 2002 and gave it the name “the Sarbanes-Oxley Act of 2002.” The next day, both houses of Congress voted on it without change, producing an overwhelming margin of victory: 423 to 3 in the House and 99 to 0 in the Senate. On July 30, 2002, President George W. Bush signed it into law, stating that it included “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.” (”Elisabeth Bumiller, Bush Signs Bill Aimed at Fraud in Corporations”, The New York Times, July 31, 2002, page A1.)

[via Wikipedia]

Cost of SOC implementation

There is considerable debate over the specific requirements of the Sarbanes-Oxley act, as written. Some people in the business community have acknowledged that, as John Thain, CEO of the New York Stock Exchange states, “There is no question that, broadly speaking, Sarbanes-Oxley was necessary” [1]. However, the cost of implementing the new requirements has led some to widespread questioning of how effective or necessary the specific provisions of the law truly are.

For companies, a key concern is cost of updating information systems to comply with the control and reporting requirements. Systems which provide document management, access to financial data, or long-term storage of information must now provide auditing capabilities. In most cases this requires significant changes, or even complete replacement, of existing systems which were designed without the needed level of auditing details.

Costs associated with SOX 404 compliance have proven to be significant. According to the Financial Executives International (FEI), in a survey of 217 companies with average revenue above $5 billion, the cost of compliance was an average of $4.36 million. The high cost of compliance throughout the first year can be attributed to the sharp increase in hours charged per audit engagement. This has been a boon for the auditing profession, more than offsetting the reduced revenues arising from the Act’s restriction against those firms conducting various non-audit services for audit clients.

As more companies and auditors gain experience with SOX 404, audit costs have been falling. Audit firm revenues are still higher than they were prior to the Act, although audit fees were rising prior to the Act, partly as a result of the accounting scandals that prompted the Act.

[via Wikipedia]

10,000 seats per year

You might be suprised to learn that according to Marston Mills there are approximately 60,000 publicly traded companies and an additional 20,000 private companies with boards of directors in the United States. This results in a total of 80,000 boards nationwide. Experts estimate that the average board tenure lasts approximately eight years, meaning that in any given year, up to 10,000 board seats must be filled.

Major Duties of Board of Directors

Brenda Hanlon, in In Boards We Trust, suggests the following duties (as slightly modified by Carter McNamara to be “nonprofit/for-profit neutral”).

1. Provide continuity for the organization by setting up a corporation or legal existence, and to represent the organization’s point of view through interpretation of its products and services, and advocacy for them

2. Select and appoint a chief executive to whom responsibility for the administration of the organization is delegated, including:

• to review and evaluate his/her performance regularly on the basis of a specific job description, including executive relations with the board, leadership in the organization, in program planning and implementation, and in management of the organization and its personnel
• to offer administrative guidance and determine whether to retain or dismiss the executive

3. Govern the organization by broad policies and objectives, formulated and agreed upon by the chief executive and employees, including to assign priorities and ensure the organization’s capacity to carry out programs by continually reviewing its work

4. Acquire sufficient resources for the organization’s operations and to finance the products and services adequately

5. Account to the public for the products and services of the organization and expenditures of its funds, including:

• to provide for fiscal accountability, approve the budget, and formulate policies related to contracts from public or private resources
• to accept responsibility for all conditions and policies attached to new, innovative, or experimental programs.