Year-one lessons to strengthen your company’s ethical and compliance culture Highlights

Timely, thorough internal investigation of whistleblower tips is essential.

Monetary awards aren’t the primary motivator. Whistleblowers prefer to report issues internally— if the company demonstrates an ethical culture.

New anti-retaliation measures could present litigation and brand risks.

Companies can build the right culture by establishing policies, conducting training, and actively demonstrating their values.

Sometimes the numbers don’t tell the whole story. That’s certainly the case for the SEC Office of the Whistleblower (the Office). It was established by the Dodd-Frank Act to incent individuals to come forward with information about suspected securities fraud and financial wrongdoings.

During its first full year in operation, the Office received just over 3,000 leads1 and issued one financial award for tips leading to monetary sanctions above its $1 million threshold. In June 2013, a second award was issued. Payments of the awards will be made as the sanctions are collected.

While two-in-thousands does not sound noteworthy, whistleblower reform is having widespread impact. It is influencing corporate practices related to employee behavior, risk management, and compliance.

Leading companies are drawing lessons from the Office’s annual report to build stronger ethics and compliance programs. They’re also considering what it takes to create a highly ethical culture. Learn how they’re being proactive when it comes to whistleblower challenges—and how your company can be, too.

Widespread impact of the reform:

1. Inside companies. Companies are re-evaluating their ethics and compliance functions—and learning how to undertake and fund credible internal investigations that can withstand public scrutiny. This is a positive development, as companies are finding that tipsters typically come to them before going to the Office.

2. At the SEC. The Office posted 143 enforcement judgments and orders that exceeded the $1 million threshold for award eligibility in the first year of operation.2 Through June 2013, the SEC had posted 56 notices of covered action, keeping companies on their toes and ready to respond to any fed-sponsored investigations.

3. Beyond US borders. The whistleblower program has benefited enforcement of the Foreign Corrupt Practices Act (FCPA) globally. In the first year of operations, the Office received 115 tips pertaining to FCPA violations, seven of which resulted in award-eligible enforcement actions.3

July 2013

10Minuteson whistleblower reform

1 US Securities and Exchange Commission, Annual Report on the Dodd-Frank Whistleblower Program, November 2012.

2 Ibid.3 Ibid.

Menu

At a glance

Tips received by geographic location Tips received by allegation type

Where’s the whistle blown, and why? US companies should especially be on alert for these violations.

Source: US Securities and Exchange Commission, Annual Report on the Dodd-Frank Whistleblower Program, November 2012.

0% 10% 20% 30% 40% 50%

WA

NJ

TX

FL

NY

International

CA

All other US states

4%

4%

6%

7%

9%

11%

15%

44%

0% 5% 10% 15% 20% 25%

Other

Misstatement or omission inpublic filing or financial statement

Offering fraud

Manipulation of a security

Insider trading 6%

15%

16%

18%

28%

Trading and pricing 5%

Foreign Corrupt Practices Act 4%

Unregistered offerings 3%

Market event 3%

Municipal securities and public pension 2%

30%

Menu

01

Ready, set, respond: Prepare internally for tip-offs

While the Office doesn’t require whistleblowers to first report tips to the company, it encourages internal reporting to speed the overall process of halting securities law violations and minimizing harm to investors.

Only 2% of whistleblowers reported solely to an outside source like the media or government, according to a 2011 survey by the Ethics Resource Center.4 Whistleblowers actually prefer to report internally first. Most who went outside did so after seeing no response or action to their internal report.

Time is of the essence

Once an individual reports a matter internally, the clock starts ticking—for the tipster and the company. The tipster has 120 days to report the matter to the Office to be eligible for a monetary award. The 120-day period is crucial for the company as well. It can use this time to thoroughly investigate the matter, plan and conduct remediation if necessary, and report back to the employee. By proactively responding, the company signals that it takes this and other ethics and compliance matters seriously, and it better positions the company to mitigate negative consequences.

Companies will need to carefully think through their follow-up actions, which may include a discussion with legal counsel about whether to conduct an internal investigation and whether to report the matter to the SEC.

Companies aren’t required to self-report, but the SEC considers the promptness of voluntary self-reporting when deciding whether and to what extent to grant leniency for cooperating with its investigations.

Widespread impact

Investigating allegations can be complicated and time-consuming. And they can be even more so when they take place beyond US borders. The SEC received more than 100 tips related to the FCPA.5 While its annual report didn’t specify where the FCPA tips came from, it notes that tips came from all 50 states, the District of Columbia and Puerto Rico, and 49 other countries.6

And in the coming year, the SEC predicts larger whistleblower payouts as a result of some high-impact cases, according to Stephen Cohen, Associate Director of the SEC’s Division of Enforcement.7

4 2011 National Business Ethics Survey, Ethics Resource Center, 2011.

5 US Securities and Exchange Commission, Annual Report on the Dodd-Frank Whistleblower Program, November 2012.

6 Ibid.7 National Press Club Corporate Crime Reporter conference, May 2013.

Menu

02

Results—not incentives—matter

Corporate climate counts

External reporting is more common if a company’s ethical commitment is weak

Source: Inside the Mind of a Whistleblower: A Supplemental Report of the 2011 National Business Ethics Survey, 2012.

0

1

2

3

4

5

SupervisorsTop managementOverall culture

1%

Perceived stronger ethical commitment

Perceived weaker ethical commitment

4%

1%

5%

1%

5%

Per

cent

age

who

rep

orte

d e

xter

nally

firs

t

Many opponents of the whistleblower provisions predicted that the potential for big-dollar payouts would undermine internal compliance programs. Critics thought employees would report alleged violations directly to the SEC rather than go through established internal channels.

Instead, companies haven’t seen a drop-off in tips received by internal ethics hotlines since the Office began operations, according to a survey of chief audit executives and internal audit directors.8 Eighty-four percent of survey respondents said the number of tips has stayed the same. The majority of respondents also said they have little or no concern that employees will bypass internal reporting processes to take their complaints directly to the SEC.

The real motivators

Whistleblowing is not a new concept. Employees have always had external outlets through which to report, such as the government or the media. Some, like the Internal Revenue Services’ Informant Whistleblower Award Program, also offer financial rewards.

When employees report outside the company in various types of situations, it’s not all about a monetary reward. Instead, it’s the severity of the issue or a chilly ethical and compliance culture that

drives employees to report externally. Eighty-two percent of employees said they would report outside if it was a big enough crime, compared to only 43% who said they’d do it for money.9

Generally speaking, other motivations for outside reporting include:

• If keeping quiet might harm other people

• If keeping quiet would cause more harm to the environment (e.g., a water supply)

• If the problem was ongoing

• If the company didn’t do anything about an employee’s initial report10

A company’s ethics and practices are big influencers in the decision of whether to report outside the company. For example, employees are three times more likely to report only to an external source if their company does not have an ethics hotline, anonymous reporting mechanism, or discipline system.11

Having confidence in what the company stands for can also make a big difference to employees. Companies that foster open communication, cooperation, and coaching can help create a healthy environment of trust.

8 “The Pulse of the Profession: A Look Ahead at 2013,” The Institute of Internal Auditors, November 2012.

9 Inside the Mind of a Whistleblower: A Supplemental Report of the 2011 National Business Ethics Survey, 2012.

10 Ibid.11 Ibid.

Menu

Menu

03

Building trust, battling retaliation

Source: Retaliation: When Whistleblowers Become Victims, A Supplemental Report of the 2011 National Business Ethics Survey, Ethics Resource Center, 2012.

High stakes are involved when it comes to the anti-retaliation protections from the Dodd-Frank Act. In planning a response to whistleblower tips, companies need to understand that the anti-retaliation measures are critical to both their brand and litigation risk.

The Act designed these protections to prevent employers from taking adverse employment action or discriminating against a whistleblower because he or she provided information or participated in an SEC investigation or administrative action.12

What’s at stake? Whistleblowers who believe they have been retaliated against have the ability to recover up to two times back pay and be reinstated. And importantly, the SEC now has “enforcement powers” to bring sanctions against companies in response to retaliation.

The whistleblower provisions are also intended to make it easy for employees to file a complaint—providing a direct avenue to federal court instead of having to exhaust administrative remedies, for example, through the Department of Labor. And there’s a long statute of limitations: A whistleblower has up to six years after the retaliatory conduct to file a claim.

Retaliation rising

These new protections are timely. Retaliation rates in general have been rising. The Ethics Resource Center in 2012 reported that 22% of whistleblowers experienced some sort of retaliation, including being

passed over for raises and promotions, relocated, or demoted because they reported misconduct. The Center also noted an 83% increase in the reported rate of retaliation in the last five years.

Fostering the right environment

For the whistleblowing reform to function as intended, employees must feel that their concerns are being heard and addressed in a non-retaliatory environment. To demonstrate this, companies should engender trust and respect with their employees by conducting investigations promptly and communicating transparently with employees.

Clear complaint procedures and strong anti-retaliation policies and guidelines can assure employees that their complaints will be addressed properly and that retaliation will not be tolerated.

Taking preventative measures

To further prevent an outbreak of retaliation, companies should investigate all complaints and maintain well-documented records. This way, they can respond to possible future claims of retaliation and have concrete evidence to provide as a defense.

Don’t shoot the messenger

Retaliation is linked to dramatic decreases in how engaged employees are with their companies

12 Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010, Sec. 922.

0%

20%

40%

60%

80%

100%

Experienced retaliation

Did not experience retaliation

Engaged

Not engaged

Per

cent

ages

of e

ngag

ed a

nd n

ot e

ngag

ed e

mp

loye

es

28%

72%

46%

54%

04

The best protection? Build a highly ethical culture

Source: PwC, 2012 Annual Corporate Directors Survey, September 2012.

Boards take action

How boards are responding to the whistleblower rules

Placed greater emphasis on employee awareness of ethicsand compliance policies

Increased reporting of compliance-related issues to the board

Enhanced the company’s follow-up process on compliance-related complaints

Expanded the role of internal audit for bribery and corruption compliance

Increased employee training on anti-retaliation against whistleblower

Schedule more boarddiscussions regardingbribery and corruption

Other

66%

42%

42%

36%

31%

11%

3%

There’s no substitute for a highly ethical culture. Here’s how leading companies achieve that.

1. Cultivate compliance

• Be proactive. Raise employees’ awareness of their rights and responsibilities under the SEC’s whistleblower provisions. Update them on the provisions and stress their importance in promoting an ethical culture.

• Encourage employees to speak up. Two-thirds of directors indicated that their company emphasizes employee awareness of ethics and compliance policies in response to the new whistleblower provisions.13 Some companies assess adherence to ethical and compliance standards in performance evaluations.

2. Count on a trickle-down effect

• Increase engagement up top. Emphasize ethics at the highest levels of management. Half of the respondents in our survey reported that their boards had held discussions regarding tone at the top in the past 12 months.14 This can influence the attitude and ethics of middle management and lower-level employees.

•Open a dialogue. Are compliance and ethics part of the everyday dialogue? A truly ethical environment is pervasive throughout the company. Employees should feel comfortable going to their managers and supervisors about an issue.

3. Put training into place

• Getspecific. Whistleblower training should be done in addition to ethics and compliance training. Our survey suggests companies are responding, as 30% of directors said their company had increased employee training on anti-retaliation against whistleblowers.15

• Go global. Companies may need to focus attention on and train personnel in non-US territories if there are different cultural expectations about reporting violations.

4. Invest to improve

• Build up. Leading companies create an ethics and compliance function across the whole organization. They analyze all whistleblower events to identify root causes and implement change. Getting to that level will require additional resources.

13 PwC, 2012 Annual Corporate Directors Survey, September 2012.14 Ibid. 15 Ibid.

Menu

Upcoming 10Minutes topics

A new model for revenue recognition

Are you ready for the new global accounting standard for revenue recognition? This year a final standard is expected to be released, and it could significantly change the way you determine your key financial measures. The new standard is one-size-fits-all, so no matter your industry, you’ll follow a five-step process to recognize your company’s revenue. It’s a big change that will require different processes, technology, and judgment calls—prepare now to ensure your business makes the transition smoothly.

Industry series: Drug value in the new health ecosystem

Pharmaceutical companies stand ready to be tested in a world where a drug’s success is more closely tied to its performance. The challenges mount with competition from generics and growing pressure to reduce costs. Now, insurers and integrated providers are driven by models that reward health outcomes and cost savings. For success, drug makers are exploring real-world evidence, new payment models, and the right partnerships.

Using your supply chain in your strategy

New research provides concrete evidence that supply chain performance and financial performance go hand in hand. A high-performing supply chain can yield bottom-line efficiencies while driving top-line growth. Learn what your company can do now to manage your supply chain as a strategic asset that boosts both performance and profitability.

Menu

How PwC can help

This publication is printed on Domtar Cougar stock, containing 10% post consumer waste fiber. It is Forest Stewardship Council™ (FSC®) certified, and a premier member of the Domtar EarthChoice family.

© 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 10Minutes® is a trademark of PwC US.

PwC US helps organizations and individuals create the value they’re looking for. We’re a member of the PwC network of firms with 169,000 people in more than 158 countries. We’re committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com/us. AT-13-0215

To have a deeper discussion about how the whistleblower provisions may impact your business, please contact:

Elizabeth Paul US Strategic Thought Leader, National Professional Services Group (973) 236-7270 elizabeth.paul@us.pwc.com

Mary Ann Cloyd Leader, Center for Board Governance (973) 236-5332 mary.ann.cloyd@us.pwc.com

Barbara Kipp Partner, Risk Assurance (617) 530-4602 barbara.h.kipp@us.pwc.com

Sara DeSmith Partner, National Professional Services Group (973) 236-4084 sara.desmith@us.pwc.com

Gregory Johnson Director, National Professional Services Group (973) 236-7365 gregory.johnson@us.pwc.com

10Minutes are now available in 60 seconds.Download the FREE 10Minutes app.

Learn more through videos, interactive graphics, slideshows, and podcasts.

Tell us how you like 10Minutes and what topics you would like to hear more about. Just send an email to: 10Minutes@us.pwc.com.

Menu