Whistleblowing Whistleblowing: A Definition A whistleblower is an employee, former employee, or member of an organization, especially a business or government agency, who reports misconduct to people or entities that have the power and presumed willingness to take corrective action. Generally the misconduct is a violation of law, rule, regulation and/or a direct threat to public interest, such as fraud, health/safety violations, and corruption. Benefits Whistleblowing leads to good and bad results. First, the benefits of carefully considered whistleblowing can lead to the end of unethical business practices. The lives of individuals and whole communities have been saved by whistleblowers. Severe damage to the environment has been stopped by the actions of one individual who blew the whistle on an unethical employer. Here are some examples of serious ethical violations that have resulted in whistleblowing. These examples represent significant consequences to businesses: Dumping of toxic waste Padding an expense report Violating laws about hiring and firing Violating laws about workplace safety Violating health laws which lead to documented illness and even death The actions of whistleblowers are potentially beneficial to society. Businesses that engaged in unethical practices have been shut down because of the actions of whistleblowers. Lives have been saved, and severe damage to the environment has been averted because of the courage and persistence of whistleblowers. Detriments An employee who witnesses unethical business practices at work may want to think carefully before making the decision to inform an authority of the practice. The consequences of whistleblowing are often extreme and include possible firing, civil action, or even imprisonment. Furthermore, an employee may want to follow the rule of "chain of command" – that is, begin to discuss issues of whistleblowing with his or her immediate supervisor first, before discussing the matter with anyone else. The employee may want to do research before he takes action. A great deal of information about whistleblowing, whistleblower’s rights and protection, whistleblowers in many countries and in many professions (sports, the tobacco industry, chemical industry, and even the government) is available on the World Wide Web.
Detriments, 2 Company loyalty is an internationally held value. Employees want positive work environments. Most workers do not like to have disagreements with their bosses. At the same time, bosses and managers do not want employees to complain to others in the workplace about a problem that the manager might be able to solve. Complaining to one’s colleagues can be harmful to morale and should not be confused with careful thinking and action on behalf of unethical business practices. One company’s unethical practices were uncovered by an employee who was later fired for "blowing the whistle." No employee wants to be branded as having bad judgment. When should an employee blow the whistle? When should he or she "keep quiet"? Guidelines for Whistleblowing Magnitude of consequences An employee considering whistleblowing must ask himself or herself these questions: How much harm has been done or might be done to victims? Will the victims really be "beneficiaries"? If one person is or will be harmed, it is unlikely to be a situation that warrants whistleblowing. Probability of effect The probability that the action will actually take place and will cause harm to many people must be considered. An employee should be very sure that the action in question will actually happen. If the employee does not know if the action will happen and if the action will harm people (or the environment), the employee should reconsider his or her plan to blow the whistle. In addition, the employee must have absolute proof that the event will occur and that people (or the environment) will be harmed. Temporal immediacy An employee must consider the length of time between the present and the possibly harmful event. An employee must also consider the urgency of the problem in question. The more immediate the consequences of the potentially unethical practice, the stronger the case for whistleblowing. For example, the effects of toxic waste dumping that are likely to occur in a week are more pressing than the firing of 100 employees next year. Proximity The physical closeness of the potential victims must be considered. For example, a company that is depriving workers of medical benefits in a nearby town has a higher proximity than one 1,000 miles away. The question arises about matters of emotional proximity or situations in which the ethical question relates to a victim with some emotional attachment to the whistleblower. Concentration of Effort A person must determine the intensity of the unethical practice or behavior. The question is how much
intensity does the specific infraction carry. For example, according to this principle, stealing $1,000 from one person is more unethical than stealing $1 from 1,000 people. http://exchanges.state.gov/FORUM/JOURNAL/bus4background.htm Legal History The first U.S. law adopted specifically to protect whistleblowers was the Lloyd-La Follette Act of 1912. It guaranteed the right of federal employees to furnish information to the United States Congress. The first U.S. environmental law to include an employee protection was the Water Pollution Control Act of 1972, also called the Clean Water Act. Similar protections were included in subsequent federal environmental laws including the Safe Drinking Water Act (1974), Resource Conservation and Recovery Act (also called the Solid Waste Disposal Act) (1976), Toxic Substances Control Act (1976), Energy Reorganization Act of 1974 (through 1978 amendment to protect nuclear whistleblowers), Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, or the Superfund Law) (1980), and the Clean Air Act (1990). Similar employee protections enforced through OSHA are included in the Surface Transportation Assistance Act (1982) to protect truck drivers, the Pipeline Safety Improvement Act (PSIA) of 2002, the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century ("AIR 21"), and the Sarbanes-Oxley Act, enacted on July 30, 2002 (for corporate fraud whistleblowers). 2002 Sarbanes Oxley Act The United States, legal protections vary according to the subject matter of the whistleblowing, and sometimes the state in which the case arises. In passing the 2002 Sarbanes-Oxley Act, the Senate Judiciary Committee found that whistleblower protections were dependent on the "patchwork and vagaries" of varying state statutes. Still, a wide variety of federal and state laws protect employees who call attention to violations, help with enforcement proceedings, or refuse to obey unlawful directions. Whistleblower Protection Act of 2007 The U.S. Supreme Court dealt a major blow to government whistleblowers when, in the case of Garcetti v. Ceballos, it ruled that government employees did not have protection from retaliation by their employers under the First Amendment of the Constitution. The free speech protections of the First Amendment have long been used to shield whistleblowers from retaliation by whistleblower attorneys. In response to the Supreme Court decision, the House of Representatives passed H.R. 985, the Whistleblower Protection Act of 2007. President George W. Bush, citing national security concerns, promised to veto the bill
should it be enacted into law by Congress. The Senate's version of the Whistleblower Protection Act (S. 274), which has significant bipartisan support, was approved by the Senate Committee on Homeland Security and Governmental Affairs on June 13, 2007. However, it has yet to reach a vote by Senate as a hold has been placed on the bill by Senator Tom Coburn (R-OK). According to the National Whistleblower Center, Coburn's hold on S. 274 has been done to further President Bush's agenda. Whistleblowers: Examples Jeffrey Wigand, “The Insider” Karen Silkwood, “Silkwood” FDA Whistleblowers Doug Durand of TAP pharmaceuticals Time Magazine’s 2002 Persons of the Year The Insider Jeffrey Wigand, vice president for tobacco research and development at Brown & Williamson: Wigand became the whistle-blower on Big Tobacco, telling how the industry minimized tobacco's health and safety issues. His story was told in the movie The Insider. The tale gets nasty. Wigand was fired in 1993. His former employer publicized unsubstantiated allegations of shoplifting and domestic abuse from his past. He went on to assist the U.S. Food and Drug Administration in its investigation of the tobacco industry. Wigand now runs a nonprofit foundation in South Carolina devoted to educating children about health issues, including tobacco use and alcohol consumption. Karen Silkwood, “Silkwood” Karen Silkwood was a chemical technician at the Kerr-McGee's plutonium fuels production plant in Crescent, Oklahoma, and a member of the Oil, Chemical, and Atomic Workers' Union in the early ’70s. On November 5, 1974, Silkwood performed a routine self-check and found almost 40 times the legal limit for plutonium contamination. She was decontaminated at the plant and sent home with a testing kit to collect urine and feces for further analysis. Oddly, though there was plutonium on the exterior surfaces (the ones she touched) of the gloves she had been using, the gloves did not have any holes. This suggests the contamination did not come from inside the glovebox, but from some other source. The next morning, as she headed to a union negotiation meeting, she again tested positive for plutonium. This was surprising because she had only performed paperwork duties that morning. She was given a more aggressive decontamination.
Karen Silkwood died on November 13, 1974 in a fatal one-car crash. The circumstances of her death have been the subject of great speculation. Since then, her story has achieved worldwide fame as the subject of many books, magazine and newspaper articles, and even a major motion picture. FDA whistleblowers: Robert Misbin Robert Misbin, medical officer, Food and Drug Administration: The scientist blew the whistle on the dangers of the diabetes drug Rezulin. He resigned from the FDA in the fall of 2000, complaining that politics and bureaucratic concerns had replaced sound medical judgment in approving drugs. At issue: that drug maker Warner-Lambert Inc. had pressured the FDA to approve Rezulin, despite a number of patient deaths from liver failure. Rezulin was recalled in 2000, the same year that Warner-Lambert was acquired by Pfizer. FDA whistleblowers: Vioxx Critics describe the rise and fall of Vioxx as a cautionary tale of masterful public relations, aggressive marketing and ineffective regulation. "The FDA didn't do anything," says Eric Topol, chief of cardiovascular medicine at the Cleveland Clinic. "They were passive here." Sen. Chuck Grassley, R-Iowa, says the FDA was worse than passive. Investigators for the Senate Finance Committee, which Grassley chairs, met Thursday with FDA researcher David Graham, lead scientist on a study presented in August at a medical meeting in France. The study, an analysis of a database of 1.4 million Kaiser Permanente members, found that those who took Vioxx were more likely to suffer a heart attack or sudden cardiac death than those who took Celebrex, Vioxx's main rival. Based on their findings, Graham and his collaborators linked Vioxx to more than 27,000 heart attacks or sudden cardiac deaths nationwide from the time it came on the market in 1999 through 2003. Graham told the finance committee investigators that the FDA was trying to block publication of his findings, Grassley said in a statement. "Dr. Graham described an environment where he was 'ostracized,' 'subjected to veiled threats' and 'intimidation,' " Grassley said. Graham gave Grassley copies of e-mail that appear to support his claims that his superiors suggested watering down his conclusions. Rep. Tom Davis (R-VA) wrote: "In light of Merck's withdrawal of Vioxx ... and other recent news stories examining FDA's review of the safety and efficacy of antidepressant drug use by children, I am concerned whether FDA has been sufficiently aggressive in monitoring drug safety.“ http://www.usatoday.com/news/health/2004-10-12-vioxx-cover_x.htm Doug Durand of TAP
As vice-president for sales at TAP Pharmaceutical Products Inc. in Lake Forest, Ill. Doug Durand listened in disbelief to a conference call among his sales staff: They were openly discussing how to bribe urologists. Worried about a competing drug coming to market, they wanted to give a 2% "administration fee" up front to any doctor who agreed to prescribe TAP's new prostate cancer drug, Lupron. When one of Durand's regional managers fretted about getting caught, another quipped: "How do you think Doug would look in stripes?" Durand didn't say a word. "That conversation scared the heck out of me," he recalls. "I felt very vulnerable." It wasn't just the 2% kickback scheme that got TAP in trouble. For years, TAP sales reps had encouraged doctors to charge government medical programs full price for Lupron they received at a discount or gratis. Doing so helped TAP establish Lupron as the prostrate treatment of choice, bringing in annual sales of $800 million, about a quarter of the company's revenues. The government calculates that TAP bilked federal and state medical programs out of $145 million throughout the 1990s. To get some sense of just how big TAP's fine is, consider that it's nearly nine times what Merrill Lynch & Co. (MER ) agreed to pay in May after the New York Attorney General accused its analysts of issuing misleading investment research. The only penalty that comes close is the $750 million that hospital chain HCA Inc. (HCA ) paid two years ago to settle criminal and civil charges of Medicare-billing fraud. Doug Durand of TAP The company had a numbers-driven culture; top reps could earn $50,000 annual bonuses. They lavishly courted doctors with discounts, gifts, and trips. On his first day, Durand was stunned to learn that the company had no in-house counsel. At TAP, "legal counsel was considered a salesprevention department," he says.
Regarding the sale of Lupron to doctors, "There was no science, no discussion of the drug," he says. Just how little science would be used to promote the drug, Durand quickly learned. In Long Beach, Calif., he visited a urologist who had received a big-screen TV from a TAP rep. Turns out TAP had offered every urologist in the country (there are 10,000) a TV, as well as computers, fax machines, and golf vacations. Durand says his angry demands for information about other giveaways were ignored. Doug Durand: Secret Documentation To protect his good name and, as he puts it, to "cover his rear," Durand began gathering the inside dope on TAP and feeding Durand began to secretly document TAP's abuses. For two months, he sneaked papers home to copy, staying up for hours to type explanatory notes. Durand mailed his binder to one of the country's leading federal prosecutors. It was the first step in what would become a six-year quest to expose massive fraud at the company. Durand's
200 pages of information were so damning that TAP pleaded guilty to conspiring with doctors to cheat the government. Durand: Consequences of WB The prosecutor urged Durand to sue TAP under the federal whistle-blower program, which allows an insider to file a civil complaint alleging fraud against the government. Typically, the informant then meets with government attorneys; if they decide to proceed, the investigation is conducted in secret. Companies learn of it as the government issues subpoenas, but executives aren't supposed to know who blew the whistle. Usually, the company will negotiate a settlement to avoid a trial, as TAP did. If not, insiders can testify secretly against their employers. It wasn't easy for Durand to decide to file a suit. "I didn't even know about the law when I first approached Ainslie," he says. "I wanted to leave a trail showing I was on the side of the government, not working to cover up fraud. The idea of suing as a whistle-blower intimidated me. Nobody likes a whistleblower. I thought it could end my career." Indeed, whistle-blowers live for years as double agents with no guarantee that their personal risk will result in a trial, let alone a victory. "I asked myself all the time, is it worth taking Liz and the kids through this?" says Durand. "In the end, I always found myself believing that it was the right thing to do." After filing the suit, Durand left TAP for Astra Merck in February, 1996, but wasn't supposed to tell his new employers about the case. For the next four years, the government conducted its own investigation into Durand's allegations, which included grilling him about the documents he had collected. It was an overwhelming experience at first. "I was put in a conference room in Philadelphia with all kinds of different federal agents," he says. "I didn't calm down until the end, when everyone started greeting my attorney as an old friend. It was then I knew that I was in good hands." Because the government often asked Durand to testify on just a day's notice, he had to scramble to make excuses to take off. He almost blew his cover early on when he ran into a group of Astra Merck executives in the Chicago airport; they thought he was vacationing in Orlando. "It was wrenching, terrible," recalls Durand. "I never knew if someone would discover me as a whistle-blower. And the government was always cryptic--inching along." Nor is Durand's ordeal over. He still has to testify in the trials of the six TAP execs, five of whom used to work for him. Durand doesn't worry too much about TAP, though he does "feel sorry" for those indicted. His wife doesn't: "Doug banged his head against the wall, and nobody would listen," she says. "They knew what they were doing." Durand: Settlement and Effects After negotiating a settlement for two years, federal prosecutors announced a record $875 million fine against the company. For his efforts, Durand won an unprecedented award of $77 million, or 14% of the settlement, as allowed under the federal whistle-blower statute.
Durand's suit may well be the first of several that challenge potentially fraudulent practices in the drug industry. Schering-Plough Corp. (SGP ), Merck-Medco Managed Care LLC (MRK ), the pharmacy-benefit management unit of Merck, and others have received subpoenas from the U.S. Attorney in Philadelphia. That investigation may focus on whether drugmakers gave discounts or kickbacks on certain drugs to companies such as Merck-Medco while charging higher prices to the government. All those involved say they are cooperating with the inquiry. And Merck-Medco says its actions were legal. "Thanks to Durand and other whistle-blowers, there's a revolution coming in how drug companies set pricing, " says James Moorman, president of public interest group Taxpayers Against Fraud in Washington. http://www.businessweek.com/magazine/content/02_25/b3788094.htm The Whistleblowers: Time Magazine’s 2002 Persons of the Year Cynthia Cooper of Worldcom Coleen Rowley of the FBI Sherron Watkins of Enron Cynthia Cooper of WorldCom Cynthia Cooper was Vice-president of MCI internal audit. During a 2002 audit, Cooper discovered that some of WorldCom's financial practices were shady. The company had been classifying operating costs as capital expenditures, thereby inflating its profits. She took her findings to the audit committee of WorldCom's board. Within days, the board fired WorldCom's high-flying CFO, Scott Sullivan, and revealed that the company had overstated its profits by what ultimately proved to be $11 billion. It was the biggest fraud in U.S. corporate history. WorldCom declared bankruptcy in July 2002, after its stock's value had declined by $180 billion and its founder, Bernard Ebbers, had left the company. Coleen Crowley of the FBI Coleen Rowley was chief counsel of the FBI's Minneapolis field office. In a 13-page memo, she outlined how FBI headquarters thwarted agents' attempts to investigate Zacarais Moussaoui, the alleged 20th hijacker. The “bombshell memo” led bureau chief Robert Mueller to reorganize the agency. Rowley testified before the Senate Judiciary Committee about the FBI bureaucracy that frustrates agents' attempts at innovative investigation and mires them in paperwork.
Rowley is still employed at the FBI, but is the victim of backlash from her peers and associates. To this day, she is afraid of being fired - or worse. Sherron Watkins of Enron Sherron Watkins was vice president, Enron Corp. An accountant, she tried to warn Enron chairman Ken Lay in a six-page memo that the financial partnerships set up by the huge Houston energy company would prove disastrous and potentially destroy Enron. After meeting with Lay, Watkins says Lay assured her "that he would look into my concerns." But Lay only asked Vinson & Elkins, Enron's outside law firm, to investigate. Nothing happened. Enron declared bankruptcy. Since she lived in Texas where whistleblowers are not protected by law. She was demoted 33 floors from her mahogany executive suite to a "skanky office" with a rickety metal desk and a pile of make-work projects. Then she quit. See: “Enron: The Smartest Guys in the Room” What REALLY Happened Enron is the largest company in US history to go bankrupt. Company officials used secret investments and tricky math to make Enron appear stronger than it was. This made the stock price skyrocket. The insiders (Lay, Skilling, top executives), who knew the real picture, sold their stock when the price was high and made millions of dollars. When word got out that Enron was not as successful as it claimed, the value of the company fell. Almost overnight, thousands of Enron employees were out of work and thousands of people who invested in Enron lost millions of dollars-- some even lost their life savings. Thousands of investors lost worthless stock. There were global financial repercussions as well. The collapse has made many Americans lose confidence in the stock market. If such a "successful" company abuses the trust of investors, what's to say other companies aren't doing the same thing? There are also questions about whether Enron's donations to President Bush and other politicians influenced energy policy in the U.S. http://www.pbs.org/newshour/extra/features/jan-june02/enron.html Daniel Schorr, “The Real Enron Scandal” The real Enron scandal lies not in the nervous contacts with cabinet members when the giant corporation was sliding down the tube, but in its ability to manipulate a government awash in campaign contributions in the days when the company was flying high.
That President Bush called CEO Kenneth Lay "Kenny Boy" was not a scandal. What was a scandal was that Enron profited from a climate of regulatory laxity that it helped to dictate. Mr. Lay and other Enron executives met several times last year with Vice President Dick Cheney, who was heading the president's energy task force. Mr. Cheney is still stonewalling congressional efforts to find out what happened in those meetings. But the task force recommendations for "reforming" the utility regulation law to provide "greater regulatory certainty" (read: deregulation) could have been written by Enron. Enron helped create what some called a regulatory "black hole." The Bush White House was deeply penetrated by a company that became the nation's seventhbiggest corporation not by making energy but by making deals. Economic counselor Lawrence Lindsey had been a paid adviser. Political strategist Karl Rove had been a big investor. Republican national chairman Mark Racicot had been a paid lobbyist. Lay himself had been on an early list of possible cabinet appointments. So much influence did Enron wield with the Bush administration that Lay could tell Curtis Herbert Jr., chairman of the Federal Energy Regulatory Commission, that he would be reappointed if he changed his views on electricity regulation. Mr. Herbert didn't, and he wasn't. Congress was not left untainted. More than two-thirds of the Senate and 40 percent of the House benefited - if that's the word - from Enron money, some of which is now being returned by embarrassed lawmakers of both parties. The $5.8 million in campaign donations from Enron sources since 1989 appear to have been a good investment. The tax rebate provision of the House-passed economic stimulus package alone would give Enron $254 million. The consequences of Enron's penetration of the United States government remain to be investigated by anyone left in government who doesn't have to recuse himself. Some day we may know whether Enron would have been able to bilk employees, investors, and a nation, were it not for that regulatory black hole that it bought for itself. Enron is not unique in the annals of lobbyist interests prevailing over the public interest. From contracts for unneeded weapons to a banana trade war, the decisions tend to come out in favor of the big contributors. What makes the Enron story different is the drama of the huge implosion in full view of thousands of victimized employees and investors. http://www.csmonitor.com/2002/0118/p11s03-cods.html Some good links for more info http://www.wanttoknow.info/021222time.personofyear http://www.opinionjournal.com/weekend/hottopic/?id=110007924
http://www.caslon.com.au/whistlecasesnote.htm http://www.forbes.com/forbes/2005/0314/090.html 2002 Sarbanes Oxley Act The Sarbanes-Oxley Act of 2002 was enacted in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of the affected companies collapsed, shook public confidence in the nation's securities markets. Named after sponsors Senator Paul Sarbanes (D-MD) 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. President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt." The legislation establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms.It does not apply to privately held companies. 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. Debate continues over the perceived benefits and costs of SOX. Supporters contend that the legislation was necessary and has played a useful role in restoring public confidence in the nation's capital markets by, among other things, strengthening corporate accounting controls. The Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure. Causes of Sarbanes Oxley A variety of complex factors created the conditions and culture in which a series of large corporate frauds occurred between 2000-2002. The spectacular, highly-publicized frauds at Enron, WorldCom, and Tyco exposed significant problems with conflicts of interest and incentive compensation practices. These frauds and others resulted in over U.S. $500 billion in market value declines. The analysis of their complex and contentious root causes contributed to the passage of SOX in 2002. Specific contributing factors and events included: Causes of Sarbanes Oxley Boardroom failures: Boards of Directors, specifically Audit Committees, are charged with establishing oversight mechanisms for financial reporting in U.S. corporations on the behalf of
investors. These scandals identified Board members who either did not exercise their responsibilities or did not have the expertise to understand the complexities of the businesses. In many cases, Audit Committee members were not truly independent of management. Auditor conflicts of interest: Prior to SOX, auditing firms, the primary financial "watchdogs" for investors, also performed significant non-audit or consulting work for the companies they audited. Many of these consulting agreements were far more lucrative than the auditing engagement. This presented at least the appearance of a conflict of interest. For example, challenging the company's accounting approach might damage a client relationship, conceivably placing a significant consulting arrangement at risk. Securities industry conflicts of interest: The roles of securities analysts, who make buy and sell recommendations on company stocks and bonds, and investment bankers, who help provide companies loans or handle mergers and acquisitions, provide opportunities for conflicts. Similar to the auditor conflict, issuing a buy or sell recommendation on a stock while providing lucrative investment banking services creates at least the appearance of a conflict of interest. Banking practices: Lending to a firm sends signals to investors regarding the firm's risk. In the case of Enron, several major banks provided large loans to the company without understanding, or while ignoring, the risks of the company. Investors of these banks and their clients were hurt by such bad loans, resulting in large settlement payments by the banks. Others interpreted the willingness of banks to lend money to the company as an indication of its health and integrity, and were led to invest in Enron as a result. These investors were hurt as well. Internet bubble: Investors had been stung in 2000 by the sharp declines in technology stocks and to a lesser extent, by declines in the overall market. Certain mutual fund managers were alleged to have advocated the purchasing of particular technology stocks, while quietly selling them. The losses sustained also helped create a general anger among investors. Executive compensation: Stock option and bonus practices, combined with volatility in stock prices for even small earnings "misses," resulted in pressures to manage earnings. Stock options were not treated as compensation expense by companies, encouraging this form of compensation. With a large stock-based bonus at risk, managers were pressured to meet their targets. 11 Titles of SOX: Titles 1-3 TITLE I -- "Public Company Accounting Oversight Board (PCAOB)" Title I establishes the Public Company Accounting Oversight Board , to provide independent oversight of public accounting firms providing audit services ("auditors"). It also creates a central oversight board tasked with registering auditors, defining the specific processes and procedures for compliance audits, inspecting and policing conduct and quality control, and enforcing compliance with the specific mandates of SOX. Title I consists of nine sections.
TITLE II -- "Auditor Independence" Title II consists of nine sections, establishes standards for external auditor independence, to limit conflicts of interest. It also addresses new auditor approval requirements, audit partner rotation policy, conflict of interest issues and auditor reporting requirements. Section 201 of this title restricts auditing companies from doing other kinds of business apart from auditing with the same clients. TITLE III -- "Corporate Responsibility" Title III mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports. It defines the interaction of external auditors and corporate audit committees, and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports. It enumerates specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance. For example, Section 302 implies that the company board (Chief Executive Officer, Chief Financial Officer) should certify and approve the integrity of their company financial reports quarterly. This helps establish accountability. Title III consists of eight sections. Titles 4-7 of SOX TITLE IV -- "Enhanced Financial Disclosures" Title IV consists of nine sections. It describes enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures and stock transactions of corporate officers. It requires internal controls for assuring the accuracy of financial reports and disclosures, and mandates both audits and reports on those controls. It also requires timely reporting of material changes in financial condition and specific enhanced reviews by the SEC or its agents of corporate reports. TITLE V -- "Analyst Conflicts of Interest" Title V consists of only one section, which includes measures designed to help restore investor confidence in the reporting of securities analysts. It defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest. TITLE VI -- "Commission Resources and Authority" Title VI consists of four sections and defines practices to restore investor confidence in securities analysts. It also defines the SEC’s authority to censure or bar securities professionals from practice and defines conditions under which a person can be barred from practicing as a broker, adviser or dealer. TITLE VII -- "Studies and Reports"
Title VII consists of five sections. These sections 701 to 705 are concerned with conducting research for enforcing actions against violations by the SEC registrants (companies) and auditors. Studies and reports include the effects of consolidation of public accounting firms, the role of credit rating agencies in the operation of securities markets, securities violations and enforcement actions, and whether investment banks assisted Enron, Global Crossing and others to manipulate earnings and obfuscate true financial conditions. Titles 8-11 of SOX TITLE VIII -- "Corporate and Criminal Fraud Accountability" Title VIII consists of seven sections and it also referred to as the “Corporate and Criminal Fraud Act of 2002.” It describes specific criminal penalties for fraud by manipulation, destruction or alteration of financial records or other interference with investigations, while providing certain protections for whistle-blowers. TITLE IX -- "White Collar Crime Penalty Enhancement" Title IX consists of two sections. This section is also called the “White Collar Crime Penalty Enhancement Act of 2002.” This section increases the criminal penalties associated with whitecollar crimes and conspiracies. It recommends stronger sentencing guidelines and specifically adds failure to certify corporate financial reports as a criminal offense. TITLE X -- "Corporate Tax Returns" Title X consists of one section. Section 1001 states that the Chief Executive Officer should sign the company tax return. TITLE XI -- "Corporate Fraud Accountability" Title XI consists of seven sections. Section 1101 recommends a name for this title as “Corporate Fraud Accountability Act of 2002” . It identifies corporate fraud and records tampering as criminal offenses and joins those offenses to specific penalties. It also revises sentencing guidelines and strengthens their penalties. This enables the SEC to temporarily freeze large or unusual payments. Wikipedia: Sarbanes-Oxley Act Case Scenario A "security expert" for a midsize company is in charge of making sure the corporate database is secure from hackers. To achieve this task, he is assigned the job of trying to hack into the system. While doing this job, he discovers a colleague has left open several "back doors" to secure systems to make his personal access to the system (which he is entitled to) significantly easier. These back doors enabled the colleague to access all of the servers without having to enter a user name and/or password. Because these back doors would also allow anyone who
hacks the colleagues machine access to the secure servers, they are a clear violation of corporate policy. Discuss the options below: a. The security expert should do nothing. They all work for the same company and these back doors makes his colleagues job easier. b. The security expert should close the back doors, but do nothing more. c. The security expert should close the back doors and talk with the employee who violated security. d. The security expert should report the breach of security to the head of IS, knowing that the colleague will at the least be reprimanded and at the most be terminated. e. A different solution ... After answering the questions above, consider this additional fact. This is not the first time the colleague has been accused of creating back doors to give himself access to the server. He has been told about this before, so reporting him to IS will most likely result in the colleagues termination. Does this change your position in the scenario above? Case Scenario 2 An executive of a large company learns that the company is violating the state antipollution law by dumping chemicals into the lake bordering its plant. The state inspectors are being bribed to ignore the violation. What are the executive’s options? What are the consequences of each option? Which option should the executive choose? Case Scenario 3 A pharmacist receives a prescription from a physician and realizes ti is for a dangerous, highly addictive, and largely discredited medication. She calls the physician and is told to mind her own business. Should she refuse to fill it? Should she tell the customer the doctor has made a mistake? Should she call the medical board to report the incident? What are her options and which should she choose. Case Scenario 4 A medical company has a contract to dispose of medical waste from a local hospital. During the course of her work, Chantale comes across documents that suggest that Avco has actually been disposing of some of this medical waste in a local municipal landfill. Chantale is shocked. She knows this practice is illegal. And even though only a small portion of the medical waste that Avco handles is being disposed of this way, any amount at all seems a worrisome threat to public health.
Chantale gathers together the appropriate documents and takes them to her immediate superior, Dave Lamb. Dave says, "Look, I don't think that sort of thing is your concern, or mine. We're in charge of record-keeping, not making decisions about where this stuff gets dumped. I suggest you drop it." The next day, Chantale decides to go one step further, and talk to Angela van Wilgenburg, the company's Operations Manager. Angela is clearly irritated. Angela says, "This isn't your concern. Look, these are the sorts of cost-cutting moves that let a little company like ours compete with our giant competitors. Besides, everyone knows that the regulations in this area are overly cautious. There's no real danger to anyone from the tiny amount of medical waste that 'slips' into the municipal dump. I consider this matter closed." Chantale considers her situation. The message from her superiors was loud and clear. She strongly suspects that making further noises about this issue could jeopardize her job. Further, she generally has faith in the company's management. They've always seemed like honest, trustworthy people. But she was troubled by this apparent disregard for public safety. On the other hand, she asks herself whether maybe Angela was right in arguing that the danger was minimal. Chantale looks up the phone number of an old friend who worked for the local newspaper. Questions for Discussion: What should Chantale do? What are the reasonable limits on loyalty to one's employer? Would it make a difference if Chantale had a position of greater authority? Would it make a difference if Chantale had scientific expertise?