One of the major selling points of the Sarbanes-Oxley Act of 2002 was the protection for whistleblowers. The legislation required public companies to put into place “anonymous reporting mechanisms” (like hotlines) so that employees could report suspected fraud without fear of reprisal. It further required companies to protect employees from retaliation when they report suspicions of financial improprieties.

In the beginning, corporate lawyers feared that it would be too easy for employees to make frivolous reports of wrongdoing and then hide behind the law. Sarbanes-Oxley was considered very employee-friendly when it first passed. While the law may be an improvement over previous laws, the results have been dismal for employees. It seems that the results that were feared did not come to fruition.

Employees who blow the whistle aren’t nearly as protected as many thought they would be, and succeeding through appeals has been almost impossible for whistleblowers. Critics of Sarbanes-Oxley say that employees who report suspected wrongdoing and are subsequently fired have little recourse. And the burden of proof is very high for whistleblowers under the current interpretation of the law.

The Numbers
Since Sarbanes-Oxley was enacted, about 1,000 cases have been filed. According to CFO.com, almost all of those were dismissed without merit or had settlements between employees and their companies.

A report by the law firm Orrick, Herrington, & Sutcliffe LLP shows that of the whistleblower cases that have proceeded through the court system, only six have passed the first level of appeal by the companies.

The highest level of appeal of whistleblower cases at the Department of Labor, in front of the Administrative Review Board (ARB), has not been won by any employee.

The report states that 665 of the almost 1,000 cases examined were dismissed as having no merit; 126 complaints were withdrawn by the whistleblower; and 138 complaints were settled before a Department of Labor ruling. Only 17 cases were deemed to have merit and allowed to proceed.

The odds of a whistleblower succeeding in an action against a company are clearly very low. Does this say more about the whistleblowers or more about Sarbanes-Oxley? Did the cases that went away lack merit, or is the burden under the law too high for the employees?

Case in Point
David Welch may be one of the most well-known whistleblowers since Sarbanes-Oxley was enacted, in part because he was the first person to receive whistleblower protection under the law. He is the former CFO of Cardinal Bancshares, and he claimed that the company fired him after he challenged the bank’s accounting policies and internal controls. He further refused to certify the company’s financial statements.

Cardinal Bancshares says Welch was fired because he wouldn’t meet with an auditor and attorney without his own attorney being present.

At issue was Welch’s objection to classifying certain loan recoveries as income. He says that classifying them as income was misleading to users of the financial statements. However, the company says he previously did not object to the practice, and he had certified financial results that included similar items. Cardinal further defends its financial statements by asserting that even if the loan recoveries were misclassified on the income statement, net income was still accurately presented.

Welch also complained that accounting entries were being made without his knowledge, and that people without financial expertise were directing these accounting entries. He believed that as the CFO, he ought to be apprised of these matters and should have some say in them.

Although Welch won a ruling from an administrative law judge who ordered the company to reinstate him and give him back pay, that ruling was overturned. The Department of Labor’s Administrative Review Board said the judge made an error of law. The ARB ruled that allegations made by Welch were not protected under Sarbanes-Oxley.

Under the law, Welch had to prove that the financial statements of Cardinal overstated income and that someone else with his level of expertise would believe the same thing. The ARB said that the misclassification of loan recoveries did not meet this test because, in fact, the recoveries were made and the resulting financial statements reflected that recovery. Therefore, the board ruled that the financial statements filed with the SEC did not offer a misleading picture of Cardinal’s financial condition.

Despite this loss, Welch continues to pursue this matter. The next stop in this whistleblower case is court.

Looking Forward
Critics of the current law say that the burden placed upon employees is too great. Instead of protecting employees who suspect wrongdoing, the law is forcing those employees to prove that wrongdoing actually occurred. The focus has been taken off whether or not the employee had a reasonable belief that wrongdoing was committed.

Another complaint is the short timeframe for filing a whistleblower complaint. Currently, employees have 90 days after they believe they’ve been retaliated against to file a claim. Some feel that this is not enough time, especially if an employee has been fired and is conducting an extensive job search.

Some supporters of protections for whistleblowers say that the problem is not with Sarbanes-Oxley itself. Rather, the problem is with the narrow interpretation of “protected activity” by those reviewing and ruling upon the cases. They say that this narrow view is not in line with the requirements under the law.

It’s no secret that companies need employees who are willing to expose internal fraud. And studies have shown that employees are good corporate watchdogs if given the education and the tools, such as the anonymous hotline. Yet employees may be more reluctant to come forward if the dismal results for whistleblowers continue.

A balance needs to be struck between protecting employees with legitimate and reasonable concerns about fraud issues, and vetting false accusations. The evidence suggests that the employees are currently being held to an unreasonably high standard in the whistleblower cases.