Wednesday, September 8, 2010

Unintended Consequences

The referee signal for ChargingImage via WikipediaOur CEO, David Childers, put together a powerpoint slide earlier this year I really liked. The title was "Three Things I Think I Know" relating to the compliance field - the three main bullets and brief commentary follow:
  • Ever Increasing Legislation (hard to argue this one)
  • Conflicting Global Mandates (I'll explain more fully below)
  • Agencies Transitioning to Enforcement (witness the increased prosecutions for FCPA violations for example)
David's point on conflicting global mandates was simple - as governments worldwide enact legislation to decrease the incidents and impacts of unethical behavior, there is a greater chance the various laws will be inconsistent across boundaries. For instance, Sarbanes-Oxley requires publicly held US companies or those listed on US exchanges to offer a way for employees to anonymously report financial misconduct, yet Portugal and Spain have outlawed anonymity. The FCPA allows for facilitation payments in certain circumstances, but the UK Bribery Act forbids them entirely. And so on.

This issue plays out domestically as well, with the latest example the conflict between the updated Federal Sentencing Guidelines and the whistleblower bounties offered through the Frank-Dodd Act. Under the Sentencing Guidelines, companies get credit for having an effective ethics and compliance program. Furthermore, if a serious transgression is discovered, companies get credit for identifying it prior to when it might have been discovered by other means and by self-reporting. Thus, it is in a company's best interest to provide multiple ways for employees, partners and other stakeholders to come forward with reports of suspected misconduct.

Yet the Frank-Dodd Act authorizes whistleblower bounties of between 10%-30% in cases where more than $1 million is recovered, thus creating a financial incentive for employees to both wait until a fraud scheme reaches epic proprotions and not report internally, thus depriving the company of mitigating potential losses due to fraud and the opportunity to self report once discovered.

I've had a number of conversations with clients on this topic, and it is showing up more and more in webinars and online through legal advisories (like this one from K&L Gates), discussions and whitepapers and we at EthicsPoint are endeavoring to further the debate. We will be hosting a webinar entitled Whistleblowing and the New Race To Report: The Impact of the Dodd-Frank Act and Proposed Changes to the Federal Sentencing Guidelines on September 29 with Toby Bishop and Mohammed Ahmed from Deloitte Financial Advisory Services and David Childers will be speaking on the topic on an upcoming webinar hosted by Securities Docket.

Regardless of where all these things eventually shake out, I do believe that companies will be held to a higher standard with regards to their ethics and compliance programs. And from the conversations I've had over the past six months with many of our customers, I know that many forward-thinking organizations have internalized this, as ethics and compliance programs have evolved from a "check the box" mentality to one where the pursuit of a sustainable ethical culture is a top and ongoing priority.

What are your thoughts?
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