Financial Regulatory Forum

Internal compliance reporting programs must consider motivations for acting, experts say

By Guest Contributor
December 10, 2012

By Stuart Gittleman, Compliance Complete

NEW YORK, Dec. 10 (Thomson Reuters Accelus) – Preventing fraud, not just reacting once it occurs, should be the goal of every corporate compliance program, but business has a mixed record in encouraging employees to report suspected misconduct internally, speakers at a Thomson Reuters forum said Tuesday.

Preventing fraud and encouraging internal reporting has also been mandatory for public companies since 2002. Among other things, Section 301 of the Sarbanes-Oxley Act requires issuers’ audit committees to establish procedures for employees to confidentially and anonymously submit concerns over questionable accounting or auditing matters. And Section 806 of Sarbanes-Oxley generally prohibits issuers from retaliating against employees for raising these concerns.

And in 2010 the Dodd-Frank Act directed the Securities and Exchange Commission to establish a program to protect whistleblowers from retaliation and to reward them for voluntarily providing actionable original information that leads to recoveries of $1 million or more for securities violations. The SEC in August 2012 announced the first award under its program, which is codified as Rule 21F-1 et seq. under the Securities Exchange Act of 1934.

But many internal reporting programs and “hotlines” are not as effective as they could be because they do not take into account how and why people and organizations act, said Ann Tenbrunsel, a professor of business ethics at Notre Dame University.

Unethical behavior is repeated because “most interventions ignore the psychology of people being confronted with ethical dilemmas,” Tenbrunsel said. People have “blind spots” and misperceive how they and others act in the face of such confrontations, and so do entities, whether they are governmental, business or non-profits, Tenbrunsel said.

This can lead to biased attributions of motive, rationalizing that “everyone else is doing it,” conflicted interests, remembering the good and forgetting or ignoring everything else, and having “adjustable” ethical standards so the behavior falls within acceptable levels.

It can also lead to using euphemisms such as “judgment call” instead of “error” to shade the behavior more positively and compartmentalizing conduct so that no one sees it all, Tenbrunsel added.

Tenbrunsel said there is a “dark side” to rewards and the role of compensation systems and goal setting when people are pressured – or feel they are being pressured – into engaging in unethical or illegal behavior. People are also susceptible to “motivated blindness,” or the tendency to overlook things when seeing and acting on them would be adverse to their own interests or those of their group.

Compliance and internal reporting programs can be more effective if companies take these factors into account in developing and maintaining their programs, said Tenbrunsel.

But whether a program uses a hotline, a website or talking to a supervisor or human resources, the key driver of success, “for better or for worse,” is the immediate supervisor of the employee raising the alarm, said Patricia Harned, president of the Ethics Resource Center, a compliance-oriented think tank.

Surveys show that supervisors get most of the complaints and that hotlines, which were developed to comply with Section 301 of Sarbanes-Oxley, only get about 5 percent, Harned said.

Companies should not fear that potential SEC whistleblower rewards will cause a flood of people to report concerns straight to the SEC, because the possibility of getting a monetary award is the least likely motive for reporting suspected misconduct. A survey conducted after Dodd-Frank went into effect showed that almost all respondents reported internally first before considering reporting outside the entity, Harned said.

But companies should do more to encourage internal reporting, and should be sure they do not discourage it, because the more an employee tries to report internally and is rebuffed or ignored, the more likely the employee will be to perceive retaliation. And the feeling of facing retaliation for doing what they think is right drives more employees to the SEC than does a possible cash reward, Harned said.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus (http://accelus.thomsonreuters.com/). Compliance Complete (http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter at: http://twitter.com/GRC_Accelus)

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