Hypothetical, based upon a real fact pattern: A senior level accounting department employee files a report to the company’s internal audit group claiming the company is using improper accounting methods that inflate earnings and mislead investors. The employee demands that the company restate earnings for the affected periods and change accounting practices to conform to the employee’s interpretation of proper accounting practices. The company’s audit committee retains independent outside auditors (not the company’s regular auditors) to perform an investigation, but the employee refuses to provide copies of financial records he claims to possess, indicating that he is holding them for possible disclosure to the SEC. The independent auditors’ investigation concludes that the company’s financial reporting is consistent with generally accepted accounting principles. The employee openly complains during the investigation that his performance review and merit bonus have been adversely impacted by his report. These vocal complaints alienate other employees in the department, undermine trust in the whistleblower’s judgment and are having a negative impact on the entire department’s productivity.
What should the Company do?
Section 806 of the Sarbanes-Oxley Act (“SOX”) gives public company employees a cause of action if they are retaliated against for providing information or assistance in the investigation of fraud against shareholders or violations of SEC rules. Section 301 of SOX requires audit committees to establish procedures for the confidential reporting of employee concerns about accounting or auditing matters. The SEC and courts are closely scrutinizing employer conduct for any indications of retaliation.
- Employers that have laid appropriate groundwork can deal with whistleblower employees who believe they are “golden” and thus have a license to be uncooperative with the investigation and disruptive in the workplace. What steps are important?
- Employers should ensure that terms of employment and their ethics policies include an obligation on the part of each employee to cooperate with the company’s reasonable requirements to enable it to effectively investigate a whistleblower claim or other alleged misconduct by that or any other employee.
- Specifically, if it is part of the employee’s job responsibilities (as is the case here with a senior level accounting employee) to assist in accounting investigations, the employer should document this responsibility in the employee’s job description at the time of hire.
- Employers must notify employees of the existence of a system to report alleged misconduct and emphasize that whistleblowers will not be subject to retaliation.
- The employer’s complaint and investigation protocol must assure employees of anonymity - including within the company - so employees’ job performance evaluations can be entirely separate from the investigation of alleged misconduct.
- Job performance problems should be well-documented.
With these elements in place, employers have greater flexibility to deal with an uncooperative employee. If the whistleblower’s supervisor does not know about the employee’s claims of accounting misconduct because of anonymity, the employee will have trouble showing a link between the whistleblower complaint and his adverse employment reviews. The fact that in this hypothetical the employee himself publicized his whistleblower actions means that the employer must be rigorous about informing supervisors of the no-retaliation policy. Documenting examples of the employee’s poor performance and negative impact on his co-workers is critical.
Perhaps most important here is that the employer’s credible investigation - which demonstrated that there were no improper accounting practices - enables it to argue that the whistleblower’s carping is not justified; particularly because the employee has interfered with the investigation (that he prompted) by withholding documents he considers relevant to his complaint. Failure to provide these documents further diminishes the whistleblower’s credibility, to say nothing of the fact that the judgment of this employee who holds a senior level accounting position in the company and is supposedly knowledgeable about these matters was overruled by outside accountants.
Finally, if the employer has a preexisting policy that is part of the terms of employment requiring employees to cooperate with investigations, failure by the employee to cooperate provides a basis to take negative action. A New York Federal Court recently threw out a discrimination claim under Title VII by a terminated employee who refused to cooperate in an investigation, because when hired he promised to “truthfully and fully testify, provide information, or respond to questions (under oath when required) concerning matters of official interest,” subject to disciplinary sanctions including removal.
Given the increasing focus by the SEC and the serious consequences of engaging in retaliation to employers that are public companies (including possible delisting) the least a whistleblower could do is cooperate in a good faith independent investigation of the issues he raises.