Whistleblower activity will fuel increased litigation in 2011.

Since the advent of the Sarbanes-Oxley Act, public companies have been required to provide a means for employees to communicate inappropriate financial and accounting control activity to the Audit Committee in a confidential manner.  The Dodd-Frank Act expanded the use of whistleblower systems in an effort to avoid the SEC’s own whistleblower setup.  Whistleblower systems are now considered a best practice in corporate and non-profit governance.  The easiest (and cheapest) way to accomplish this is to engage an outside company to host a whistleblower reporting system to receive these complaints.

According to a recent study of litigation trends by Fulbright & Jaworski LLP, whistleblower activity is expected to increase in the coming year and be a significant contributor to litigation growth.   The report highlights the following information gleaned from survey respondents:

  • One-fifth of the respondents were the subject of a whistleblower allegation in the past three years.
  • A  similar proportion expect those allegations to grow in 2011.   
  • Most of the prior year’s whistleblower allegations sparked an internal investigation, with 51% requiring third-party proceedings and 43% resulting in a regulatory investigation.
  • The industries reporting the most whistleblower activity are engineering, health care, manufacturing and retail/wholesale.

This litigation category is one where the old adage about an ounce of prevention rings particularly true.  The proper handling of these whistleblower complaints (which includes the hiring of a reputable and capable outside service provider to run these systems) is critical in reducing the potential  for costly outside intervention.  Our experience is entirely different than the above survey results.  If complaints are accepted using qualified personnel (vs. untrained personnel using scripts), there is no good reason why the large number of special investigations noted in the survey should occur. 

See Best Practices in Whistleblower Systems for additional information.

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