What
measures for accountability should the UK be considering in the wake of the US’
financial accounting frauds? Lawyer
David Gibson advises
As
economic globalisation continues, the truism ‘that if the US sneezes then the
UK catches a cold’ could not be more apt.
There
has been an increasing number of financial accounting frauds in the US during
the past year. The failings of the US corporate governance model have led to
proposals for change to ensure greater levels of transparency and
accountability. Such issues have been the subject of substantial interest in
the UK press, which has focused on the need for greater accountability in the
financial markets.
For
many, the US financial system was a model of good corporate governance. But
this reputation is now somewhat tainted. A key component of an effective
corporate governance model is the ability for employees to blow the whistle on
financial irregularities or offences.
The
US system for the protection of whistleblowers is complex involving a number of
different federal and state statutes.
Michigan, for example, has recently enacted a Whistleblowers’ Protection
Act (WPA), which protects employees from retaliation after they report
suspected violation of laws or regulations. The WPA provides specific remedies
including injunctive relief or damages and reinstatement. Other states have
adopted even stricter laws with greater penalty provisions.
Those
people working for federal agencies are also protected from being dismissed for
whistleblowing.
US
legislation stretches across a broad range of specific subject areas including
financial sectors, environmental issues and health and safety at work. This is
rather different to the UK model, which has one specific piece of legislation –
the Public Interest Disclosure Act 1998 (PIDA) – which is not industry specific.
Certain
principles are common to both countries. Many policies in the US have a system
where there is a clearly recognised procedure for making a disclosure, for
example, protection for the person who is whistleblowing and appropriate
sanctions for those who suffer a detriment as a result of whistleblowing.
In
the US, state bodies governing particular industries have greater powers to
take punitive action. However, this may change. In the UK, the FSA are
attempting to raise the profile of the PIDA in an attempt to ensure that
whistleblowers are comfortable about coming forward.
A
more substantial difference between the two models is that in the US, the
Security and Exchange Commission – which regulates the financial sectors – can
pay a sum of money to people who actually blows the whistle. The proviso is
that the person is not a compliance officer, and the disclosed offence actually
leads to a penalty being levied.
This
policy initiative has been shied away from in the UK. There were fears that
employees would turn people in to receive the cash, rather than for the
honourable goal of raising awareness of a particular wrongdoing.
As
the negative ramifications of fraud in the marketplace are increasingly seen
and felt by investors greater steps may need to be taken in the UK to ensure a
greater element of transparency and accountability. Perhaps the UK could learn
that instead of catching the cold, which, although there are some side effects,
could help alleviate a few of the symptoms.
At-a-glance guide to UK whistleblowing regulations
● The
PIDA was implemented in the UK to provide the parameters for effective
whistleblowing. A recent report by The Work Foundation has highlighted that 930
claims had been lodged in the Employment Tribunal since implementation.
● The
PIDA protects workers, not just employees – therefore contractors come within
the protection of the legislation. The PIDA introduced specific rights to
workers regarding disclosure of information about certain wrongdoings and gives
the disclosing worker the right not to suffer any detriment.
● Any
disclosure must be a ‘qualifying disclosure’. If a criminal offence has been
committed or is likely to be committed, for instance, a person has failed, is
failing or is likely to fail to comply with any legal obligation to which he is
subject; a miscarriage of justice has occurred, is occurring or likely to
occur; the health and safety of an individual has been, is being or is likely
to be endangered.
●
In order to be a "protected disclosure", it must be made to a set
category of person. The appropriate conduit for making a protected disclosure includes
employers or a legal adviser in the course of obtaining legal advice. A
protected person can also make a disclosure to an appropriate third party but
only in extreme circumstances where they believe that an employer would
deliberately ignore a disclosure – the Financial Services Authority, for
example. The criteria governing this set of circumstances are very strict.
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Implementing
a whistleblowing policy, which gives workers the confidence to bring issues to
the attention of management, is imperative. Such early warning mechanisms could
avoid embarrassing publicity. A policy should identify what does or does not
constitute a protected disclosure, who the disclosure should be made to, a
response time for dealing with the complaint and an assurance that the worker
making the disclosure will not be victimised.
David
Gibson is a solicitor at law firm Dickinson Dees www.dickinson-dees.com
