Sarbanes-Oxley Hotlines: Employee Or Third Party Whistleblower?
To satisfy the compliance standards set forth in section 301 of The Sarbanes-Oxley Act, internal reporting of potential financial misappropriation of funds via anonymous whistleblowers is mandated.
In order for the anonymity of the reporting employees to remain intact, a Sarbanes Oxley hotline is fast-becoming the avenue of choice for reporting alleged financial-centered complaints to the respective audit committees; for it is the audit committees who will eventually determine the validity of each complaint.
When faced with a pair of primary options, companies are choosing to either hire third-party vendors, or to use internal staff as whistleblowers. Both have their pros and cons and neither is the perfect solution for all companies. Each will be briefly outlined as follows.
Third-Party Whistleblowers:
The use of third-party vendors for SARBOX 301 compliance provides the following benefits for companies.
· A hands-off approach to the receipt, documentation, and retention of all financially-related complaints.
· Freedom to focus on other areas of SARBOX compliance requiring a greater amount of reporting and resources.
· A release from one aspect of the overall SARBOX compliance process.
On the other hand, the use of an outsourced Sarbanes Oxley hotline carries with it a group of potential disadvantages and/or risks. This list includes the following.
- The loss of attorney-client privilege for specific portions of the complaint process.
- Third-party vendors are not under direct company guidance if ordered to testify in an SEC investigation.
- The inability to place complaints in a proper company/business-related context, i.e., having enough knowledge about the company to be able to determine a level of risk per complaint.
Internal Employee Whistleblowers:
Many companies (in order to avoid the risks associated with third-party hotlines) are incorporating internal Sarbanes Oxley hotlines for the following reasons:
· Companies can maintain the ability to develop their own approach to ascertain the validity (and level of risk) for each whistleblower complaint and handle each accordingly. Handling whistleblower complaints in this manner gives companies and audit boards more control over incoming complaints; therefore adding weight to more-pressing complaints.
· By utilizing internal staff as whistleblowers, companies can also use their own resources and legal counsel therefore reducing the cost of outsourcing such services.
· Making use of an internal staff and legal counsel better preserves the attorney-client relationship with regard and access to privileged information.
The downside of employing an internal staff to handle the Sarbanes Oxley hotline duties are additional accountability and the holding up of additional company resources. Many companies, however, feel these costs outweigh the costs of outsourcing.
A Brief Conclusion:
Section 301 of SARBOX is centered on the reporting, receipt, allocation, and administration of anonymous tips or complaints regarding potential corporate financial misdeeds and should not be taken lightly. Whichever option (either a third-party or an internal staff) is chosen, it needs to be in the best interest of the company, its employees, and their shareholders. When the ink is dry, however, a Sarbanes Oxley hotline needs to be in place.
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