Whistleblowers are people who report the illegal or fraudulent actions of their employers, and they've been a part of the business world for centuries. Some people see whistleblowers as heroes for their bravery and integrity, while others loathe them for their disloyalty. Legislation to protect and encourage these informers has changed business and the way it operates in the United States, in both positive and negative ways. (To read more, check out Infamous Insider Traders.)
TUTORIAL: Economic Basics
The History of Whistleblowing
In the United States, whistleblowers attained their first protections in 1863, under the False Claims Act. The purpose of the act was to bring to light fraud by government suppliers. Whistleblowers received a portion of the funds recovered by the government.
In 2002, the Sarbanes-Oxley Act enhanced these initiatives in order to prevent more large-scale business failures, such as Enron and Worldcom. Those who reported improper acts were protected from dismissal or other reprisals by their employers. Publicly-traded companies were required to set up internal procedures to allow employees direct and confidential access to the company's audit committee, and outlined the steps the committee was required to take to investigate and remedy the issues.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act increased both incentives and shielding for whistleblowers working for companies that report to the Securities Exchange Commission.
One of the first high profile whistleblowers in the U.S. was Karen Silkwood, a chemical technician at the Kerr-McGee plant in Oklahoma. In 1974, Silkwood reported serious systemic health and safety violations at the plant to the Atomic Energy Commission. In November of that year, she began testing positive for plutonium contamination, which she believed was malicious retribution for reporting the company.
That same month, Silkwood gathered all of the documentation she had collected and was headed to a meeting with a New York Times reporter. On the way there, she was involved in a mysterious car accident that killed her. The cause of the accident has never officially been confirmed. (For more, see Handcuffs And Smoking Guns: The Criminal Elements Of Wall Street.)
In 2002, Sherron Watkins, a vice president at the multi-national Enron Corporation, testified before a Senate committee and exposed the company's numerous fraudulent attempts to falsify the financial statements. The scandal led to one of the largest corporate failures in history.
Olympus Corporation suffered a blow when, in 2011, its corporate president, Michael Woodford, reported publicly that the corporation had transferred hundreds of million dollars to offshore corporations. His tenure as CEO lasted for 14 days and he was dismissed after he questioned the transactions. He is currently fighting this decision in court and seeking compensation. Olympus has yet to respond publicly to the issue.
How Corporate Governance Has Changed
The increasing government encouragement for reporting corporate fraud and illegal activities has led to changes in the way corporations operate. Some corporations have responded by tightening up access to corporate information. The less information available to employees, the less that can be used against the company.
Others have improved their governance policies to ensure that internal fraud cannot occur. There has been a trend towards stricter internal controls and CEO reporting requirements. While these procedures, most of which were mandated by the Sarbanes-Oxley Act, have cost companies significant administrative dollars, they are the first step towards creating an environment where whistleblowers will no longer be needed.
The Bottom Line
Knowing that employees can report any suspicious corporate activities has had an impact on companies' operations. The role of the whistleblower is difficult but more transparency in corporate management improves investor confidence and assists in the market economy.
(For related reading, see Standards And Ethics For Financial Professionals.)