Ruling Extends SOX Whistleblowing Protections
By Richard D. Alaniz
Under the Sarbanes-Oxley Act (SOX) of 2002, whistleblowers enjoy wide-ranging protections for reporting wrongdoing at their companies. Until now, those protections have mostly applied to employees at publicly traded companies. But following a recent ruling by the US Department of Labor's Administrative Review Board (ARB) - in Spinner v. David Landau and Associates - accounting firms that do work for public companies may be far more vulnerable to whistleblowing claims under SOX.
According to the ruling, whistleblower protections in Section 806 of SOX extend to employees of those who work for publicly traded companies. The ARB ruling stands in contrast to an earlier decision by the US Court of Appeals for the First Circuit.
Accounting firms need to understand the implications of the Spinner decision and what they can do to limit their vulnerability to SOX-related whistleblowing claims by their employees.
In light of the recent rulings:
- All accounting firms should meet with their in-house attorneys and outside counsel to be sure that they understand the decisions and how those could impact their firms, partners, and other employees.
- Firms should also regularly communicate with their attorneys, trade groups, and industry associations to stay on top of any new rulings or developments.
The SOX Provision
When SOX legislation was passed ten years ago, the depth of protection for whistleblowers was notable, and so were the penalties for anyone who retaliates against whistleblowers. Under SOX, publicly traded companies are required to adopt a code of ethics and set up an internal system for employee complaints about fraud or ethical violations. If employees sought protection under the SOX whistleblower statute, they could claim liability against both the company and individuals at the organization.
According to the act, no publicly traded company or "any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee" to report alleged fraud.
Would-be whistleblowers first must file a report with the Occupational Safety and Health Administration. The complaint is then adjudicated by an administrative law judge who rules on the matter. If the judge rules in favor of the employer, the employee can appeal the case either to federal district court or to the ARB.
In the original legislation, it was not clear which employees were covered under the whistleblower provisions. As a result, courts and the Department of Labor have come to opposite conclusions.
The Spinner Case
The Spinner case involved a CPA, a certified internal auditor, and certified fraud examiner who worked for David Landau and Associates. Spinner was assigned full-time to provide auditing services to S.L. Green Realty, a publicly traded company. When the accounting firm removed Spinner from the client's account and fired him, he alleged that he was terminated because he reported internal control issues and reconciliation problems at S.L. Green Realty. Spinner filed a complaint alleging violations of the SOX whistleblower provision.
David Landau tried to get the SOX complaint dismissed, claiming in part that it was not covered under SOX since it was not a publicly traded company. Initially, a Labor Department administrative law judge agreed and dismissed the case. On appeal, the ARB reversed and remanded the case back to the administrative law judge, ruling that Spinner could make a claim under SOX since he was employed by a contractor of a publicly traded company.
"Nothing in the SOX's legislative history indicates that Congress intended to limit whistleblower protection under Section 806 to only employees of publicly traded companies," the board noted in its ruling. "Indeed, denying coverage to employees of contractors, subcontractors, or agents runs counter to the goals of Section 806 and SOX generally. The purpose of the statute is to protect the investing market and the employees who blow the whistle on issuer-related activities contained in Section 806."
The board explicitly rejected a ruling by the First Circuit in Lawson et al. v. FMR LLC, which found that SOX's whistleblower protection only applies to employees of publicly traded companies. The Lawson case involved two investment advisors who claimed they were retaliated against, in violation of SOX. In that case, the court interpreted the language of the law to exclude contractors and employees of contractors. "If we are wrong and Congress intended the term 'employee' in § 1514A(a) to have a broader meaning than the one we have arrived at, it can amend the statute. We are bound by what Congress has written," wrote the judges in that ruling.
Next Steps for Accounting Firms
The contradictory rulings in Spinner and Lawson put accounting firms in a confusing situation. For accounting firms in the states within the First Circuit - Maine, New Hampshire, Massachusetts, and Rhode Island - the less-stringent Lawson ruling limiting whistleblower claims to public companies remains in effect. However, accounting firms in all other states and territories could now face claims from their own employees who work on matters for publicly traded companies.
Firms outside the First Circuit should consider themselves liable under SOX for whistleblowing issues involving publicly traded companies. These firms should carefully review their current policies and procedures for handling employees' concerns about activities at the companies they audit. If the firm does not have a clear, explicit plan in place for addressing reported concerns and escalating them appropriately, it is time to develop one. Any current plans should be reviewed with input from legal and HR.
Accounting firms should also review training for all accountants and other employees who work with publicly traded clients. These people need to understand their responsibilities under SOX and other federal laws. The firm should explicitly state that employees should feel comfortable raising concerns about clients, that their concerns will be taken seriously, and, most importantly, that they will not be retaliated against for bringing up issues.
Persons with supervisory responsibility should also receive training so they know how to respond to complaints and about the importance of maintaining a culture of compliance.
If an employee who has previously raised concerns about a client is subject to disciplinary action, the firm should proceed carefully. Every step of the process should be thoroughly documented to help insulate the firm and individuals from potential whistleblower claims and minimize liability in court or administrative hearings.
Whistleblower awards under SOX can be particularly expensive and drag in not just the firm, but individual partners and others. Accounting firms need to prepare themselves for a possible uptick in the number of SOX whistleblower claims, and they need to take proactive steps to head off potential problems and minimize their risk.
- Sarbanes-Oxley Act Whistleblower Provisions: Practical Concerns
- Proposed Whistleblower Standard Presents Challenges
About the author:
Richard D. Alaniz is senior partner at Alaniz and Schraeder, a national labor and employment firm based in Houston. He has been at the forefront of labor and employment law for over thirty years, including stints with the US Department of Labor and the National Labor Relations Board. Rick is a prolific writer on labor and employment law and conducts frequent seminars to client companies and trade associations across the country. Questions about this article can be addressed to Rick at (281) 833-2200 or firstname.lastname@example.org.
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