The joy of uncooking: the new corporate accountability law puts new burdens on HR in an effort to prevent companies from cooking the books - Employment Law

HR Magazine, Nov, 2002 by Jonathan A. Segal

On July 30, President Bush signed into law the Sarbanes-Oxley Act of 2002. Designed primarily to end the recent corporate "book-cooking" epidemic, the act applies to all public companies, as well as private companies that have filed a registration statement with the Securities and Exchange Commission (SEC) in connection with a pending initial public offering.

The law has attracted a lot of attention by establishing new requirements for corporate executives--and stiff penalties for non-compliance. The act:

* Requires CEOs and CFOs to certify periodic corporate financial reports.

* Prohibits personal loans or extensions of credit to executive officers and directors.

* Requires that guidelines be established for audit committees.

* Requires reimbursement by CEOs and CFOs of bonus and stock option profits upon certain restatements of financial statements.

* Prohibits insider trading during pension fund blackout periods.

* Requires the retention of all documents relevant to a government investigation.

The penalties for non-compliance are staggering. For example, a CEO or CFO who falsely represents company finances may be fined up to $1 million and/or imprisoned for up to 10 years. The penalty for willful violations is up to $5 million and/or 20 years imprisonment.

While these aspects of the law have garnered significant attention, a number of provisions that directly affect the employer-relatively unnoticed. A prime example: The act prohibits retaliation against whistleblowers and government informants. Both of these groups are defined broadly.

Violations of the act's anti-retaliation provisions also may result in significant civil and criminal liability, discussed in more detail below.

All publicly traded companies will need to take steps to comply with the act's requirements, most of which went into effect immediately. While many of these steps will fall outside of the bailiwick of HR, HR professionals will need to take action with regard to the act's non-retaliation provisions. In addition, if HR is to be a strategic partner in corporate affairs, HR professionals must understand where the act's corporate mandates intersect with existing HR policies and practices so they can dovetail HR policies and practices with corporate compliance efforts.

This article provides a detailed analysis of the anti-retaliation and document retention provisions of the act, as well as a more general overview of the HR implications of the new law.

Employment-Related Provisions of the Act

Whistleblower protection. The act includes a whistleblower provision with two subsections.

One subsection bars retaliation against employees who either file or assist in proceedings related to alleged violations of SEC rules or violations of federal laws regarding fraud against shareholders. The protection under this subsection is absolute and without qualifiers, unlike the next subsection (discussed below), which has several factors that limit when and how it will apply.

The second subsection states that companies subject to the rules of the SEC may not "discharge, demote, suspend, threaten, harass or in any other manner discriminate against an employee" who provides information or assistance for investigations into corporate conduct that the employee "reasonably believes" are a violation of SEC rules or federal laws pertaining to fraud against shareholders. But, under this provision, employees are protected only when they provide information or assistance to certain groups--namely:

* A federal regulatory or law enforcement agency.

* Any member or committee of Congress.

* A person who holds supervisory authority over the employee or the authority to investigate, discover or terminate misconduct.

Information given to anyone else does not appear to qualify for protection. This suggests, for example, that employees who leak information to the media are not protected from retaliation.

However, it is important to note that employees who provide information or assistance to one of the named groups are protected even if the information they provide does not relate to a violation of the law. As long as employees "reasonably believe" that the conduct they report is a violation, they are protected.

Because the term "reasonably" is used to qualify "belief," an objective standard probably applies. That is, the question courts will ask is whether a reasonable person would believe that the conduct constitutes a violation. It is likely that reasonableness will be judged based on the experience, skill and position of the employee providing the information.

While the act is not entirely clear on what constitutes a reasonable belief," the law is clear that individuals may be protected when they provide information to external sources--even if they have not first provided it internally. This is in direct contrast to whistleblower protections under some state employment laws, which require employees to file complaints internally before expressing concerns externally.