Publications

• 30 Second Ideas
• Accounting Updates
• Alerts
• Articles
• Business Surveys
• Construction Edge
• Healthcare Edge
• Insurance Edge
• Legal Talent
• Manufacturing Edge
• Not-for-Profit Edge
• Quick Links & Good Ideas
• SEC Edge
• Strategy Insights Blog
• Surviving the Upturn
• Tax Highlights

Beyond the Financial Statement

Most companies focus their Sarbanes-Oxley Act (SOX) compliance efforts on Section 302, which requires CEOs and CFOs to certify the accuracy of financial statements, and Section 404, which requires management to annually evaluate the effectiveness of internal controls over financial reporting. These two sections are indeed critical, but you shouldn’t overlook SOX’s lesser-known provisions, particularly those dealing with whistleblowing and document destruction.

The rights of whistleblowers

Section 806 of SOX prohibits public companies, as well as their officers, employees and agents, from retaliating against employees who report suspected fraud to: 

• A supervisor or other company representative
• A federal regulatory or law enforcement agency 
• Congress

Unlawful retaliation includes termination, demotion, suspension, failure to promote, harassment or any other form of discrimination. Employees who allege retaliation can file a complaint with the Secretary of Labor or sue the company for damages.

It’s important to understand that whistleblowers don’t have to be right about their allegations to receive this protection. Employees are protected as long as they reasonably believe that the company’s conduct violated federal fraud laws or regulations. A separate SOX provision, Section 1107, makes it a federal crime to knowingly retaliate against an employee who reports a violation of any federal law to a law enforcement officer.

To protect employees—and your company—establish a formal process for receiving employee complaints and preventing retaliation. Make employees aware of the process and train supervisors to recognize SOX complaints and handle them appropriately.

To prove a violation of Section 806, employees must show that they engaged in a protected activity, that the employer knew about it and that whistleblowing was a contributing factor in their termination or unfavorable treatment. You can avoid liability by demonstrating that you would have taken the same action regardless of the employee’s whistleblowing. Be sure to thoroughly document the reasons behind all personnel decisions.

Rules of document retention

Section 802 of SOX imposes criminal penalties on anyone who “knowingly alters, destroys, mutilates, conceals, covers up, falsifies or makes a false entry in any record, document or tangible object” with the intent to obstruct a federal investigation or bankruptcy proceeding. Documents aren’t limited to hard copies; they include digital files, e-mails, voice-mail messages and other electronic records.

Although SOX doesn’t require your company to keep documents forever, you should have well-designed, written document-retention policies and procedures to help ensure that you preserve the documents you need while disposing of those you don’t. Don’t forget to include procedures for backing up, archiving and purging electronic documents.

To avoid allegations that documents were destroyed in bad faith, train employees to apply your document-retention and destruction policies consistently. Also develop a mechanism for placing a “litigation hold” on the destruction of documents that might be relevant to a federal investigation or legal proceeding.

SOX: A comprehensive law

SOX touches virtually every aspect of a public company’s business. To stay in compliance and avoid potential civil—even criminal—penalties, you must look beyond your company’s financial statements. 

Questions on SOX compliance? Contact Brian Langham at 312-980-2990.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.