How to encourage internal reporting of fraud or misconduct

In July, the 5th U.S. Court of Appeals ruled in Asadi v. G.E. Energy (USA) LLC that whistle-blowers aren’t entitled to protection under the Dodd-Frank Act’s anti-retaliation provision unless they report directly to the Securities and Exchange Commission (SEC).

This ruling — currently limited to Texas, Louisiana and Mississippi — may provide incentive to bypass the internal process for reporting suspected fraud or misconduct.

When going directly to the SEC, employees not only get monetary awards for information that leads to successful enforcement actions but also have the assurance of protection against retaliation, says Carolyn Bremer, senior manager in Forensic and Litigation Services at Weaver.

“Already, many companies are struggling to keep internal compliance programs strong, actively looking for ways to encourage employees to utilize their internal reporting processes,” she says.

Smart Business spoke with Bremer about how to instill trust in your internal compliance program in the Dodd-Frank era.

What has been the impact of Dodd-Frank on whistle-blower reporting to the SEC?

According to its annual report on the Dodd-Frank Whistleblower Program for fiscal 2012, the SEC received 3,001 whistle-blower tips and awarded a second whistle-blower award this past June. There may be an uptick in tips because of the announcement of these recent monetary awards, the expected increase in future awards and the court ruling.

Why do employees hesitate to internally report fraud or suspected misconduct?

Employees often hesitate because of bad experiences either personally or from co-workers’ stories. Reasons for not reporting potential fraud or misconduct include the fear of not remaining anonymous, fear that no one will believe them, or fear of retaliation such as losing their job, not receiving a raise or being demoted. They also fear discrimination or isolation from co-workers, or sense that the tone at the top doesn’t support the policies.

What can be done to alleviate hesitation?

A company can instill trust in reporting internally by focusing on strengthening its hotline process and whistle-blower policy.

Your hotline must provide a way to report in confidence, while being monitored by an appropriate party. Avoid having tips go directly to human resources or management. Employees should see the monitor as more independent — such as in-house counsel, head of internal audit or a compliance officer — especially if they fear retaliation.

Ensure there are clearly defined timelines or checkpoints for follow up, which include communicating back to the whistle-blower that the tip is being handled discreetly and the issue is being addressed appropriately.
Have a documented whistle-blower policy that addresses retaliation protection. What is considered retaliation and the penalties for it should be clearly outlined. For example, ‘harassment or victimization for reporting concerns under this policy will not be tolerated’ is insufficient. A better statement is: ‘No employee who in good faith reports a violation of the code of conduct or potential fraud or misconduct shall suffer harassment, retaliation or adverse employment consequences. An employee who retaliates against someone who reported in good faith is subject to discipline up to and including termination of employment.’

By voluntarily extending the whistle-blower protections afforded under Dodd-Frank to all employees who report internally, companies introduce additional trust.

Why is it important that employees feel comfortable reporting matters internally?  

In bypassing internal compliance, employees deprive the company of the opportunity to investigate and remedy a wrongdoing before regulators get involved. Many tips don’t warrant the SEC’s attention but do warrant corrective action or communication within the company. However, management can’t address a problem they don’t know about.

Nevertheless, there are obvious instances that warrant direct reporting to the SEC, and it’s always advisable for employees to seek legal advice when deciding whether to report internally or externally.
Strengthening your hotline process and whistle-blower policy, and educating your employees, can be key to instilling trust in internal whistle-blower reporting.

Carolyn Bremer is senior manager of Forensic and Litigation Services at Weaver. Reach her at (972) 448-6951 or [email protected].

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