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Compliance : Sarbanes Oxley : Whistleblower : Sarbanes Oxley
Leveraging the Whistle-Blower Protection Provision
for SOX compliance
By
Adam Edmunds
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Adam Edmunds
CEO
SilentWhistle.com
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One of the biggest challenges companies face with Sarbanes-Oxley (SOX) lies in executing and enforcing the rules systematically to obtain full compliance. However, by taking a strategic, proactive approach to comply with individual provisions of SOX, companies gain the advantage of not eating the entire proverbial elephant all at once. This well-planned proactivity should be balanced with the obvious dangers of not being fully compliant, which range from executive fines and jail terms to the harsh certainty that non-compliance will ultimately impact the organization's public image.
The overall reality of SOX is that each public company must develop an individualized approach to implementing ethical standards and proper control procedures, with the appropriate checks and balances.
Two options exist for these companies: they can choose to make minimal efforts to comply with the requirement of the mandate, or they can see the regulations as an opportunity to take an in-depth look into improving their current business practice and processes.
The introduction of SOX gives public companies, as well as desiring private companies, the opportunity to utilize processes that assess activities throughout the company. These processes ultimately provide information that allows companies to enjoy benefits that go far beyond simple compliance with SOX requirements.
Improving the Rate and Extent of SOX Compliance
The success of SOX depends highly on the rate and extent of the complying effort. A good, proactive solution for companies behind schedule might be to comply with the sections of SOX that give the best return on the time and resources available. An important stipulation of SOX is Section 301, the ?whistle-blower? protection provision that requires a company to establish procedures for the ?receipt, retention, and treatment of complaints,? including fraud and auditing abuse through an anonymous communication channel.
In a study by the Association of Certified Fraud Examiners (ACFE) - 2004 Report To The Nation on Occupational Fraud and Abuse - occupational frauds were more likely to be detected by a tip than through other means such as internal audits, external audits and internal controls. Among frauds committed by owners and executives, which tend to be the most costly, a tip from company employees identified over half of all cases examined in the study. Companies that also had an established communication channel with their third-party sources, such as vendors and customers, reported increased detection of fraud as well.
SOX addresses the subject of internal sources as natural detectors of fraud in Section 301. Therefore, some companies might consider establishing their own internal controls such as a hotline to an in-house attorney, a simple request to contact an audit committee member or a designated email address. However, these companies may overlook the danger regarding liabilities involved with in-house controls.
?Audit committees and management that internally develop employee feedback systems or hotlines frequently waste valuable time and effort, which shifts their focus off other critical business issues that should be addressed,? said Steve Hobbs, former partner of KPMG. ?SOX has put a lot of pressure on all companies, and non-compliance is a serious issue with potential significant costs and penalties. Section 301 system development and tracking are perfect candidates for outsourcing ? an outside firm can accomplish these processes more efficiently. More importantly, outsourcing allows the company to focus on monitoring the feedback activity and developing enhancements to internal controls while managing the risk of non-compliance.?
Many companies are becoming increasingly aware of the benefits of outsourcing the task of integrating an anonymous reporting system by a third party or professional service provider.
?Third party anonymous communication system providers like SilentWhistle are seeing increased demand for their services due to their ability to tailor systems for companies of all sizes,? said Dr. Steve Albrecht, former president of the ACFE and American Accounting Association, and recently appointed board member for the Financial Accounting Foundation. ?Companies are realizing that anonymous employee reporting can be outsourced very easily and inexpensively. Not only can these outsourced providers do it better, but the risk of non-compliance by a company implementing its own in-house system is too great to ignore.?
To support this claim, the same study by the ACFE found that confidential reporting tools, such as anonymous communication systems, were highly effective in helping organizations in their efforts to prevent and stop unethical behavior. In addition, organizations can also use these communication systems to disseminate various types of critical company information that otherwise would not be communicated.
"Regardless of the trust employees might have in their superiors, they are often reluctant to be completely open about issues or suggestions that potentially could influence the success or downfall of the company," Dr. Albrecht said. "An outsourced anonymous communication system allows organizations to break down these communication barriers by eliminating that reluctance, and allowing the flow of accurate communication to occur."
The Top Benefits of Utilizing a Third-Party Anonymous Communication System to Comply with Section 301
1. Helps protect company brand reputation
Publicly traded companies can experience market share drops overnight by not being aware of internal threatening issues that can escalate into a full-blown company crisis. One negatively perceived event is all it takes to ruin a brand or company reputation that took 50 years to build.
2. Deterrence
The most cost-effective way to deal with fraud is to prevent it. According to the study by ACFE, defrauded companies are unlikely to recover losses. In fact, the study reports that the median recovery of such companies totals only 20 percent of the original loss; almost 40 percent recover nothing. Furthermore, companies that have complied with federal guidelines report a 50 percent decrease in their previous problems with company fraud and abuse.
Anonymous communication systems have a deterring affect on illicit activities when employees and executives know the company has a confidential channel to report unethical behavior.
3. Sets a strong ethical tone for the company
Having a proactive approach on this matter sends a clear and positive message to shareholders, employees, the government and others that unethical behavior is not tolerated. With past memories of Enron and WorldCom, stakeholders have zero-tolerance for unethical behavior.
4. Becomes a transparent tool for executives and management
A transparent tool gives management a more in-depth and clear view of their organization. By breaking down barriers of communication, an anonymous system provides its clients with increased productivity, profitability and peace of mind. Employees and third-party sources have ideas and information that can significantly increase an organization?s bottom line, and help executives see what they?re not hearing.
5. Establishes an additional two-way dialog in the organization
By implementing an anonymous communication system, executive staff lets their employees know that they care, and that they value and welcome improvement. From simple suggestions to serious issues, a feedback system improves the company?s open-door policy. This sends strong signals that management wants to know the mindset of their employees, and encourages them to communicate openly and honestly with management. This reduces the ?corridor talk? or ?water-cooler gossip? that creates uncertainty and low productivity.
6. Creates a safer work environment and decreases employee turnover
Less fraudulent behavior and better reporting systems translate directly into a more stable environment and a better place to work. This helps to keep employee retention high in the company and will save both money and human resources.
7. Stimulates integration
This suggests that business integrity, ethics and values do not detract from performance, but in fact, add to business performance when appropriately integrated throughout an organization. Substantial performance improvement opportunities provide clear gains by integrating culture, process and technology.
8. Provides better legal protection
Confidential reporting systems allow organizations to demonstrate that they are accurately monitoring and reporting their business activities in compliance with SOX. Companies involved in litigations that can show they have taken preventative measures to deter violations of the law are granted substantial leniency when they are able to present court-admissible records showing what happened, by whom and when.
The Bottom Line
Achieving compliance to Section 301 of SOX through the integration of a third-party anonymous communication system helps companies better establish overall SOX compliance and ultimately a far-reaching, consistent corporate governance system.
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