In 2002 the Sarbanes-Oxley act (SOX) was signed into law. In a response to multiple accounting scandals in the early 2000’s, like those at Enron and WorldCom, SOX was implemented to protect investors by creating new or enhanced standards for public company boards, management and public accounting firms. SOX consists of eleven titles and within those titles two particular sections pertain to informants, Section 301 and Section 806.
- Section 301Each audit committee shall establish procedures for (a) the receipt, retention and treatment of complaints received by the issuer [i.e. public company] regarding accounting, internal accounting controls or auditing matters; and (b) the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.
- Section 806Protection for Employees of Publicly Traded Companies who Provide Evidence of Fraud amends USC chapter 73, title 18 to include “whistleblower protection for employees of publicly traded companies.” [Whistleblower protection also applies to private organizations per Section 1107 Retaliation against Informants which amends USC section 1513, chapter 73, title 18.]
What does this mean?
The whistleblower provisions in SOX are designed to facilitate and protect internal and external whistleblowers. It requires that publicly traded companies implement a confidential, anonymous way for whistleblowers to inform the company of suspicious accounting practices. Additionally, it protects whistleblowers from repercussions.
Many companies already utilize systems to report internal issues. These are often either some type of electronic system or an employee hotline. These systems are one way to ensure your company is in compliance with SOX.However, companies need to be careful to ensure their whistleblower reporting plan is truly anonymous.
Using a Third Party
Third party electronic reporting and whistleblower hotline services are a good step to ensure your company’s reporting procedures are truly anonymous. However, it is important to fully understand the extent of these third party services and you should always consult legal counsel to ensure you comply with all whistleblower provisions in SOX.