The issue of how poorly Sarbanes-Oxley protects finance executives who blow the whistle on alleged corporate abuse seems headed for a wild showdown in federal court.
And when the five-year-old case finally is heard in the Fourth District Court of Appeals in Richmond, Va., it promises to put generally accepted accounting principles in the spotlight as well. In the latest ruling, handed down in May by the Department of Labor’s Administrative Review Board, the ARB reversed a law judge’s earlier finding that a CFO deserved reinstatement and back pay because he had reported a serious violation of GAAP, and later was fired. The ARB, however, said that exposing GAAP violations doesn’t necessarily qualify an employee for Sarbox protection.
The case in question — involving Cardinal Bankshares Corp. finance chief David Welch’s 2002 firing — is the first Sarbox whistle-blower claim to wend its way completely through DoL’s Occupational Safety and Health Administration’s (OSHA) process, toward a federal-court resolution. Some experts in the employee-rights field originally saw Welch as a model claimant because he had so clearly identified wrongdoing, including the misclassification of $195,000 in loan recoveries. The company entered the amount as income, without Welch’s knowledge, improperly boosting quarterly income by 13.7 percent. Also clear was that he was thwarted in his attempts to go through corporate channels to remedy that and other problems.
Now, however, the same experts see the case as evidence that the current enforcement system is stacked against whistle-blowers — a conclusion the numbers certainly seem to validate. Indeed, in a study earlier this year by Orrick, Herrington & Sutcliffe LLP of 947 Sarbox cases, 70 percent had been dismissed and 28 percent settled or withdrawn. Only 2 percent had made it to an administrative law judge. Of the six cases to reach the ARB appeal stage, three were reversed and two settled, with a sixth remaining open.
“Welch Did Everything Right”
Richard Moberly, an assistant professor of law and employee-rights specialist at the University of Nebraska, originally figured the Welch-Cardinal case might qualify as the first to win the reinstatement and back pay that Sarbox offered to successful whistle-blowers — especially after the favorable law-judge ruling. “Welch did everything right. He reported the problems internally, and then went to the board members. In terms of transparency and law enforcement, you’d expect a case like this to be supported after the favorable ruling from the law judge,” says the professor, who testified before a Congressional committee studying the problems of Sarbox whistleblower protection.
The hearings took place May 15, three days before the ARB reversed the ruling by the administrative law judge (ALJ). Since then, legislation to “expand and simplify” employee protections has been introduced by U.S. Rep. Lynn Woolsey, chair of the House Subcommittee on Workforce Protections, and fellow California Democrat George Miller.
The ARB’s May reversal surprised the professor in part because it seemed to overturn the “objective reasonableness” standard that is supposed to support a whistle-blower like Welch who had good reason to suspect wrongdoing, even if there wasn’t positive proof. “We want people to report what they believe to be violations, but we don’t expect them to be experts on what they’re reporting. What it seems like the ARB is requiring is that Welch needed to be right; that it’s more of an absolute standard.”