Few whistle-blowers even get to the stage where they can begin to show OSHA that they were the target of a retaliation, Moberly says. Instead, 95 percent of Sarbox cases fail to get past the administrative phase. At the investigative level, an employee’s odds improve, though not by much. At that level, the agency has historically found in the employee’s favor 10 percent of the time, he says.
These numbers do not include cases that are brought before a federal court, Chinn notes. If OSHA does not respond within 180 days to an employee’s complaint, the employee can bring his or her case to court. Many cases are also settled between the employee and employer. “Publicly traded companies are very worried about Sarbanes-Oxley whistle-blower claims because it’s not just about the claim [of retaliation but the] underlying claim of fraud,” Chinn says. “Employers will resolve these cases because of the spillover effect these cases have” into possible shareholder derivative litigation and Securities and Exchange Commission inquiries.
In Welch’s case against his former employer, Cardinal Bankshares Corp., the ARB ruled that he “could not have reasonably believed that Cardinal misstated its financial condition,” and was therefore not entitled to have Sarbox protection — and thus have his job reinstated. According to Welch, he was fired after questioning the bank holding company’s accounting policies and internal controls and later refusing to certify financial statements. The bank claimed Welch was let go because he refused to speak with an independent auditor and a company lawyer without his own attorney present.
Now considered the first whistle-blower under Sarbox to go to trial, Welch first filed a complaint with the Department of Labor in 2002 for reinstatement and back pay. DOL administrative law judge Stephen Purcell recommended that Cardinal reinstate Welch, but the bank refused. On May 31, the ARB said Purcell erred legally in his decision.
The ARB has presented an “awfully high standard” to meet, according to Welch’s attorney, D. Bruce Shine of Shine & Mason Law Office. To fall under the whistle-blower protection provision, Welch didn’t need to be right, Shine argues — “all he had to do is have a reasonable belief that the issues he raised were legitimate.” His opinion, Shine adds, was supported by his knowledge and experience as a CPA, MBA and two and a half years as Cardinal’s CFO.
In 2001, Welch disagreed with Cardinal’s chief executive, who often made ledger entries. Welch disputed that two loan recoveries worth a total of $195,000 should be accounted for in a loan reserve account and not income. By including the money as income, Welch believed the company had materially overstated its financial status, according to Purcell. The accounting error was later fixed by an external auditor.
In its defense, Cardinal acknowledged the company had made an accounting mistake but emphasized that the $195,000 was still disclosed on its financial statements. “Real money came into Cardinal’s door — money that was not there before,” the company’s lawyers said, adding that “a reasonable CFO” would not have concluded that net income had been overstated.
In its decision, the ARB also argued that Welch’s complaints about his access to Cardinal’s external audit firm and the integrity of its internal controls over financial reporting do not fall under Sarbox-protected activities. Welch could not convince the board of a direct link between federal securities laws and his claim of being cut off from communicating with the company’s auditor. According to Cardinal, Purcell “fails to point to a single statute, regulation, or case that holds that an external auditor’s preference for communicating with that company’s CEO rather than its CFO constitutes securities fraud.”
The DOL’s interpretations of Sarbox have been narrow and inconsistent between OSHA, the administrative law judges, and the ARB and could be discouraging whistle-blowers from coming forward, argues Moberly. Employees who are compelled to expose a company’s misdeeds need protection to offset the risk of losing their jobs and the cost of litigation, says Moberly. “You need to give extra incentive to reduce those costs in order to get people to follow through on their impulse to do the right thing,” he argues.
A National Bureau of Economic Research study released earlier this year similarly found that Sarbox has discouraged employees from coming forward and blowing the whistle on corporate fraud. From 1996 until Sarbox’s enactment, employees made up 21 percent of fraud detectors. Since then, that number has dropped to 16 percent.