Establishing New Complaint Procedures

Audit Committees Under the Sarbanes-Oxley Act


Responsibility for handling employee complaints is new to audit committees. Committee members shouldn't rely on existing structures that direct complaints to management. Fraud examiners can help audit committees comply with the intent and spirit of section 301 of the U.S. Sarbanes-Oxley Act.  

Several months before Enron's financial situation became public, Sherron Watkins had written a seven-page, no-holds-barred letter detailing her concerns about the company's accounting practices. Watkins, an Enron vice president, had addressed it to her boss, CEO Ken Lay. According to press reports, he brushed it off. Apparently, no member of the Enron board of directors saw the letter, and her concerns didn't generate any changes in the company's financial or accounting practices. The terrible price paid by Enron shareholders and employees is well known.

The U.S. Congress enacted the Sarbanes-Oxley Act (SOX) in 2002 partly in response to the Enron situation. Among other things, SOX attempts to create new lines of communication between public companies and their employees so that people like Sherron Watkins can express concerns that will be heard by a wider audience in the company. In section 301 of SOX, Congress has now charged independent audit committees - not company management - with establishing procedures for the receipt and treatment of complaints regarding questionable accounting practices including anonymous tips from employees.

Responsibility for handling employee complaints is new to audit committees. Most companies already have procedures in place that direct complaints to management. Committee members may be inclined to rely on these existing structures and merely require that management funnel complaints dealing with accounting and auditing matters to the committee. You should review these existing structures carefully to make sure that they comply with both the intent and the spirit of section 301. In some cases, management may not have the appropriate incentive to follow up on all complaints made, particularly those that relate to alleged wrongdoing by management itself. In addition, employees may be reluctant to report concerns directly to management for fear of reprisal. In-house counsel's assistance in creating credible and effective procedures will be critical to the audit committee's performance of its increased role under section 301 in identifying potential problems before they become major financial scandals.

This article explains what you need to know about section 301 to possibly avert a compliance crisis before it develops rather than merely respond to one later. Use the list of steps in the sidebar below to develop and implement a compliant complaint procedure for your company.


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