A Brief Overview of Federal and State Protections
Over the course of their careers, a sizable percentage of accountants and other finance professionals will experience one or more instances in which their employers ask them to do something that might raise ethical or legal concerns.
These situations, which often come up unexpectedly, are as varied as the businesses in which they arise. For example, the CFO of a finance company might instruct an employee to lower an estimate of loan losses because the current figure could scare off a prospective buyer. While interfacing with external auditors, the CEO might question whether it is necessary to disclose to the auditors what is known about the rapidly declining value of an investment. Or, a sales department head might insist on using some of next quarter's sales - backed up only by letters of intent - to boost this quarter's lagging sales figures. Employees who refuse to engage in such behavior may be told they are not team players and could face repercussions from management.
In such a situation, there are essentially three courses of action; employees can: 1) give in and do what their employer or their employer's client wants them to do; 2) resign from the company; or 3) insist on doing the right thing - comply with accounting rules, refuse to engage in fraud or inaccurate reporting of data, and report the problem up the chain of command until someone listens.
Each case is unique, with differing regulations that advise employees how to act The laws or regulations applicable to a company may require an employee to report such concerns or findings up the chain of command, or the employee may feel the need to speak up as a matter of professional responsibility. As lawyers who have represented finance professionals in the very situations described above (and many others like them), the authors can affirm that those choosing the third option of "blowing the whistle" on accounting fraud can launch employees on a rough but rapid road down the corporate ladder and out the door. This possibility is widely known and contributes to the reluctance among most employees to oppose accounting fraud or other such unlawful activity.
What is less commonly known is that federal and state laws provide strong protections for employees in many such instances, and that accountants and other finance professionals can use these laws to achieve favorable outcomes when they fall victim to an employer's retaliation. The purpose of this article is to give accountants some of the information they need to know before blowing the whistle on financial wrongdoing.
Laws Protecting Whistieblowere
Most accountants are familiar with the Sarbanes-Oxley Act of 2002 (SOX), which Congress passed in the wake of the accounting scandals at Enron and WorldCom. SOX requires publicly traded companies to make certifications about their financial conditions and imposes stiff penalties on companies for misrepresenting their finances to shareholders. SOX also contains protections for accountants and other finance employees who face retaliation for providing information about, or participating in investigations relating to, what they reasonably believe to be violations of securities laws on the part of their publicly traded employers.
But SOX is not the only federal law that protects accountants who blow the whistle on financial wrongdoing. Some federal laws protect finance professionals in specific industries. Under the Federal Credit Union Act, for example, a federally insured credit union cannot fire an employee for reporting a possible violation of any law or regulation internally or externally, and any employee so terminated can sue to recover back pay and additional damages. Other laws focus on certain types of transactions. The False Claims Act, which broadly prohibits fraud on the federal government by its contractors, makes it unlawful for a contractor to retaliate against an employee for complaining about such fraud. Department of Energy regulations protect the employees of contractors who complain, either internally or to the department, of fraud or gross misuse of funds on the part of their employers. Similarly, section 1553 of the American Recovery and Reinvestment Act of 2009 (ARRA)- known as the McCaskill Amendment - prohibits retaliation against employees who report gross mismanagement and waste of stimulus package funds.
In addition to the protections provided by these and other federal laws, most states provide some form of whistleblower protections for private employees, and many of these protections are available to finance professionals who face retaliation for complaining about noncompliance with the law. While die af-will employment doctrine generally allows an employer to discharge an employee for any reason, whistleblowers in some states are protected by a "public policy" exception to this general rule. The following cases illustrate situations in which courts have upheld lawsuits by whistleblowers who suffered adverse consequences for identifying and complaining about their employers' actions that violated legal and ethical requirements.
In a case particularly relevant to accountants and others whose professions are governed by professional ethical codes, the Colorado Supreme Court upheld a lawsuit by an employee who complained that her employer's practices violated the Colorado State Board of Accountancy Rules of Professional Conduct. In Rocky Mountain Hospital and Medical Service v. Matiani (916 P.2d 519 [Colo. 1996]), a licensed CPA alerted her supervisor to numerous practices that violated the Board of Accountancy's rules, including the filing of IRS reports that misrepresented reimbursed expenses, the failure to refund overpayment of insurance claims, and the reduction of building and management service fees charged to another company in order to make that company appear more profitable and maintain its solvency rating. Her employer terminated her employment, claiming that her position was eliminated as a part of a restructuring of the company's finance department. The Colorado Supreme Court held that provisions of professional ethical codes can constitute a source of public policy for purposes of a wrongful discharge claim if two criteria are met. First, the provision must be crafted to serve the interests of the public rather than the profession. Second, the ethical code must be sufficiently public and concrete to notify both employers and employees of the standards of behavior it demands.
In the Mariani case, the court held that the rules in question were intended to ensure accurate reporting of financia] information to the public. Moreover, the court noted that the rules provided clear direction to accountants as to the scope of their duties and clear notice to employers that accountants are obligated to accurately report financial information. It was for these reasons that the court sustained Mariani's claim against her employer for discharge in violation of public policy. While the Colorado Supreme Court's ruling in Mariani remains undisturbed, no appellate court since that time has recognized a wrongful-discharge claim based solely on rules of professional conduct or ethics.
Similarly, an Oregon court found it unlawful for a bank to retaliate against an employee who refused to disclose a customer's confidential banking information. In Banaitis v. Mitsubishi Bank Ud. (879 P.2d 1288 [Or. Ct. App. 1994]), the court looked not to a professional ethical code but, rather, to civil and crimina! statutes governing privacy, the common law (i.e., judicial interpretations of the law) of privacy, and the bank's internal policies; it reasoned that the preservation of privacy is socially desirable. The court held that the employee had demonstrated that she had engaged in whistleblowing activity and suffered retaliation for it.
Even where an employee participated in the illegal activity that eventually prompted him to blow the whistle, a federal court of appeals held that the employee stated a claim for wrongful discharge in violation of public policy under the law of Delaware. In Paolella v. Browning-Ferns Inc. (158 F.3d 183 [3d Cir. 1998]), an employee protested a waste disposal company's allegedly illegal billing scheme. He complained that the company had intentionally misrepresented to its customers that a price increase it implemented was solely due to a stateimposed increase in the company's dumping costs, and had thus breached its service agreements with its customers; the company fired him. The Third Circuit Court of Appeals, applying the state law of Delaware, found that the company had violated Delaware's theft-by-false-pretenses statute: in its treatment of its customers, and upheld the employee's public-policy claim for wrongful discharge. The court also ruled that the employee's participation in the illegal activity did not deprive him of a remedy because the significant public policy reasons at issue protect a whistleblower, whether or not he can avoid involvement in the illegal activity.
These three cases represent a small selection of the case law upholding claims by employees who faced retaliation when they blew the whistle on corrupt business practices by their employers. For a more complete list of such cases, see the Sidebar. Although the various federal and state laws diner in many respects, !here are certain principles illustrated by the foregoing examples that apply in many, if not all, whistleblower cases. These cases consider lhe type of employer and its business, the employment status of the employee, the nature of the employee's complaint or "protected activity," and the question of whether the employer fired die employee because of the employee's protected activity.
Who Is Covered?
Congress and state legislatures have designed some statutory provisions to prohibit retaliation only by certain employers against certain categories of employees. For example, SOX generally protects only employees and contractors of publicly traded companies, the credit union law referenced above protects credit union employees, and some state whistleblower statutes protect only public employees. The False Claims Act provisions apply only to companies that do business with the federal government. However, many state whistleblower laws, both statutory and common-law, are available to a wide range of employees, including accountants who work for private companies or for firms working under contract with private companies. In several states, even these generally available whistleblower protections apply only where the employee has no remedy under a specific federal or state statute that governs the particular industry or type of conduct that is at issue.
What Does a Whistleblower Have to Prove?
There are three elements that most antiretaliation claims have in common: I) that the employee engaged in protected activity; 2) that the employer took adverse employment action against the employee; and 3) mat the adverse employment action against the employee was caused, or at least caused in part, by the protected activity.
What is protected activity? The laws that protect employees against wrongful termination vary widely in the types of conduct that they protect At the federal level SOX protects an employee for complaining that an employer has violated a federal securities law or some other law relating to fraud on shareholders, and some courts have applied the law's protections to complaints about non-securities-related fraud as well. The False Claims Act applies only to allegations concerning fraud on the U.S. government. Some state laws apply only where the employee has actually refused to disobey a law, or where the employee has opposed conduct that poses a direct and immediate threat to me public health or safety.
Other sate laws are much broader. For example, New Jersey's whistleblower statute makes it unlawful to fire an employee for objecting to any activity he reasonably believes to be fraudulent or criminal, and the common-law whistleblower doctrines of several states prohibit an employer from discharging an employee in a manner that violates the public policy underlying a law, even if it does not violate the law itself. Thus, in Bunaitas, above, the court's analysis included the law regarding governmental disclosure of private information - whkh was not at issue in the case - and concluded that the law showed a public policy preference for privacy of ihe kind of confidential information that was at issue. Some states even prohibit the firing of an employee for insisting on compliance with rules of professional ethics, as seen in Mariani.
One important theme is found in most but not all whistleblower laws: There is no requirement for an employee to prove that any complaint was accurate; there is only a requirement for an employee to prove a reasonable belief thai the employer's conduct constituted an unlawful or improper activity. This doctrine serves the purpose of whistleblower-protection laws, which advance society's interests by encouraging employees to come forward with genuine and well-founded concerns about the lawfulness of their employers' business practices. In most cases, as long as the employee's belief is reasonable, the employer cannot retaliate against the employee for speaking out, even if the belief ultimately proves to be wrong.
When does an employee suffer an adverse emjdayment action? In applying the antiretaliation provisions of SOX and cerlain other federal laws, the courts are increasingly recognizing the need to prohibit not just unlawful firings, but any action the employer takes that is based on an employee's proteeted activity and that would dissuade a reasonable employee from raising concerns about practices that the employee believes to be unlawful. This was the Supreme Court's holding in Burlington Northern and Santa Fe Railway Co. v. White (548 US. 53 }, in which it identified any fimateriafly adverse" employment actions as potentially retaliatory. These actions could include demotions, cuts in pay or denial of promotions, reassignment of job duties and responsibiliues, assignment of undesirable shifts, harassment, micromanagement, excessive supervision, or exclusion from important company activities. However, in many states that provide whistleblower protections to private employees, the laws come into play only when the employer actually terminates the employee, and do not prohibit acts of retaliation that fall short of termination.
What remedies are available to whistleblowers? Most of the laws discussed above purport to provide a terminated employee with a "make whole" remedy, but the laws differ on what it takes to make an injured employee whole. For example, SOX provides for reinstatement with the same seniority, back pay with interest, and compensation for any special damages resulting from the discrimination including litigation costs, expert witness fees, and reasonable attorney fees (see 18 USC section 1514A[c]). Some state laws go further and allow a wrongfully terminated employee to recover damages for pain, suffering, and emotional distress, and also to recover punitive damages in appropriate cases.
How does an employee decide whether and how to report unlawful conduct? Reporting accounting fraud or other unlawful activity on the part of an employer-and, if so, when, how, and to whom - can be a very difficult decision for an accountant or other finance professional because blowing the whistle on an employer's unlawful activity can be a career-ending move. Even so, a strong sense of duty to customers, clients, creditors, taxpayers, and shareholders compels many finance professionals to speak out about unlawful activities every year.
While the decision to blow the whistle on corporate wrongdoing should not be taken lightly and should be made only after seeking competent legal advice, many accountants and other finance professionals have spoken out and then achieved favorable outcomes when challenging their employers' retaliation. SOX and a host of other federal and state laws provide strong protections for employees, and there exist today several nonprofit organizations that stand ready to support workers who blow the whistle on unlawful activity.
VARIOUS STATES' WHISTLEBLOWER COURT CASES
Numerous states that have upheld public policy wrongful discharge actions by employees who complained of improper business and accounting practices include
Arkansas, A court upheld the lawsuit of an employee whose employer forced him to resign after he reported the company to regulators for pricing violations. Sterling Drug Inc. v. Oxford (743 S.W.2d 380 [Ark. 1988]);
Washington Stete. An employer violated state law when it terminated an employee for insisting on an accounting program that complied with federal antibribery laws. Thompson v. St. Regis Paper Co. (685 P.2d 1081 [Wash. 1984]);
Maryland. The state upheld a wrongful discharge claim by a heatthcare employee who refused to file false benefits claims in violation of federal antifraud laws. Magee v. Dansources Technical Servs. Inc. (769 A.2d 231 [Md. 200O]);
West Virginia. A bank acted unlawfully when it fired an employee for attempting to require the bank to comply with consumer credit laws. Harless v. First National Bank in Fairmont (246 S.E.2d 270 [W. Va. 1978]);
New Jersey. A court upheld the claim of an employee fired for complaining that the employer was making loans that violated federal laws designed to prevent money laundering. Potter v. Village Bank of N.J. (543 A.2d 80 [N.J. Super. Ct App. Div. 1988]);
South Dakota. An accountant stated a claim for refusing to allow the company president to convert company property to his private use. Johnson v. Kreiser's Inc. (433 N.W. 2d 225 [S.D. 1988]);
Oklahoma. A bank auditor stated a valid whistlebìower claim when he was fired for refusing to destroy or alter an audit that may have hurt the bank in a lawsuit Sargent v. Central Nat'l Bank & Trust Co, of Enid, Okla. (809 P.2d 1298 [Okla. 1991]);
Tennessee. An employer violated state whistleblower law when it fired an employee for refusing to falsify records for submission to authorities administering student loan programs. Moskal v. First Tennessee Bank (815 S.W.2d 509 [Tenn. Ct App. 1991]);
Utah. An employee stated a claim when his employer terminated him for refusing to falsify tax documents. Peterson v. Browning (832 P.2d 1280 [Utah 1992]).
David J. Marshall is a partner, and Michael A. Filoromo III is an associate, both at Katz, Marshall & Banks, IIP, a law firm based in Washington, D.C. The information contained in this article is not intended to constitute legal advice.…