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Sarbanes-Oxley: Some Practical Hints on Ways to Comply Effectively

Joseph W. Bartlett, Founder of VC Experts.com


The Sarbanes-Oxley Act has, in effect, given an extraordinary weapon to any disgruntled employee who has access to the process of preparing, auditing and/or certifying a public company's financial records and statements. Thus, Section 806 of the Act provides Federal protection (as California has for years) to employees of public companies who act as whistle-blowers. If an employee sees any conduct on the inside which the employee believes might violate the Act, any SEC rule or regulation or any "Federal law relating to fraud against shareholders," the employee has the opportunity to pursue several remedies, including blowing the whistle and seeking reinstatement, back pay, interest, compensatory damages and litigation costs. Any retribution against the employee for acting as a whistle blower may involve criminal sanctions against the responsible parties. In fact one odd way of looking at these sections of the Act is to view them as full employment guarantees. If fired for, say, drunkenness or other misconduct, all the employee has to do to get even is to send the government a letter to the effect that: "I am a whistle blower; I came to [Executive] in the company's management and told him / her that I thought that treatment of a particular item was incorrect and improper. He / she told me to shut up and mind my own business." Whether that statement is true, half true or completely false, it could have a decisive effect, which is to expose the company's management to civil and criminal penalties.

Accordingly, I am searching for ways to neutralize what I believe to be the practical risks. Of course, I am not suggesting deliberate delaying tactics, a cover-up or an evasion of the company's statutory responsibility. The SEC and the Congress have spoken and it is up to the board (including the Audit Committee) and the management to do their best to comply. I do, however, suggest that the boards of small public companies (for example) consider some form of communication on the record be made to all relevant employees, consultants and the company's auditors which (a) is accompanied by the most recent draft of the disclosure statement; (b) calls on the individual to review the same, or at least those parts of the same with which the individual or firm has reason to be familiar; and (c) says, in effect, "speak now or forever hold your peace." The letter could require that the individual, if he (or she) has any edits, objections, amendments or comments of any kind, immediately make those comments known to the appropriate individual. If there is any suspicion that the individual might be intimidated by a potential loss of his or her employment, the submission may be made in camera to the chair of the audit committee. If there is a problem with that process, the submission could be made anonymously. (There is a serious conversation going on amongst professionals regarding setting up secure mail drops and/or telephone numbers so that employees with a story to tell can tell that story to the audit committee in time for remedial action, vs. going to the Feds ex post facto.)

The point is to reach out to all hands ... and attempt to obtain comments in time to do something about them, and, if there are no comments, to establish that fact ... and for the record.


joe@vcexperts.com