Nicolas Espinosa

Associate Editor

Loyola University Chicago School of Law, JD 2024

For compliance programs to be effective, bad behavior must be reported internally to management and an avenue must exist to report externally to regulators and the media. For whistleblowers to be willing to come forward, it is critical that they are protected.

ExxonMobil was ordered to reinstate two scientists who were fired after being suspected of leaking information to The Wall Street Journal, according to a statement made by the US Labor Department earlier this month. The article entitled, “Exxon Draws SEC Probe Over Permian Basin Asset Valuation,” alleged that ExxonMobil inflated its production estimates and the value of oil and gas wells in the Texas Permian Basin by pressuring lower-level employees to use unrealistic assumptions. The article casted doubt over Exxon’s assumption in its 2019 SEC filings which stated that drilling speeds would increase substantially in the next five years. The US Department of Labor has since ordered ExxonMobil to reinstate the whistleblowers they fired.

The collapse of Enron

The importance of a whistleblower cannot be overstated. In 2001, Enron VP Sherron Watkins, famously drew attention to the issue after sending an anonymous letter to the Enron CEO, Ken Lay, warning of accounting improprieties. Though this letter sending did eventually lead to change, it was not until the SEC began an investigation into Enron’s accounting procedures and partnerships.

In an open letter to the SEC in 2019, Watkins wrote that while she was an internal whistleblower, she wanted to go outside to warn others, but lacked a clear path to make that happen. In her letter, she notes that post-Dodd-Frank, she would have had a safe path to become an external whistleblower and that having that path of reporting to the SEC is essential to helping the securities industry be a safer place of investment for shareholders. The Dodd-Frank Act’s Whistleblower Program expressly prohibits retaliation by employers against whistleblowers

How did Enron go from an industry titan to a textbook case study for the repercussions of an unethical organization? Fortune named Enron the “Most Innovative Company in America” six years in a row from 1996 to 2001. Enron was an early adopter for compliance programs, but the program was seemingly useless.

Enron had a culture problem from the executive level down through lower-level management. Even in the aftermath of Enron, the company kept status quo and justice was nowhere to be found. The average severance pay was only $4,500, while top execs were paid out bonuses totaling $55 million. Further, employees lost $1.2 billion in retirement funds, retirees lost $2 billion in pension funds, but of course executives chased in $116 million in stock. The perception of fairness may be the most powerful tool that a company can wield, and Enron threw the tool in the dumpster.

Strengthened financial regulation standards

Since the fall of Enron, the United States has strengthened its financial regulation standards. The Dodd Frank Wall Street Reform and Consumer Protection Act passed in response to the financial crisis of 2008.

Furthermore, the whistleblower protections were made through the Sarbanes-Oxley Act and the Section 404 internal controls report became more workable by permanently exempting smaller reporting companies from the auditor attestation requirements. The Sarbanes-Oxley Corporate Reform Act of 2002 enforced internal and external whistleblower protection for all employees in publicly traded companies for the first time.

Additionally, the Anti-Money Laundering Act of 2020 (AMLA), created a whistleblower program in the Treasury Department to encourage insider reporting of financial institutions’ violations of the Bank Secrecy Act. The AMLA provided that a whistleblower can recover up to 20% of the total sanction amount when they voluntarily prove original information to the Treasury Department, the Justice Department, or the whistleblower’s employer about a violation of the Bank Secrecy Act.

In September 2022, the House voted in favor of boosting protections for federal employees who blow the whistle on fraud, waste and abuse. The Protecting Our Democracy Act has received bipartisan interest. The Act ensures that whistleblowers have due process and equitable relief and expand whistleblower protections to federal employees not previously covered.

Whistleblower protections still require effective corporate compliance

Whistleblowing systems are much safer and effective today than they were in the days of Enron. Whistleblowers now have access to anonymously report wrongdoing, or asking compliance-related questions by telephone, email, internet, and paper mail.

Institutions should instill strong anti-money laundering (AML) and ethics training programs for employees as part of their compliance programs. Further, corporations should provide internal hotlines in combination with anti-retaliation policy for issues to be reported directly to the corporation. The Department of Justice and the Treasury Department have stated that voluntary disclosure of regulatory violations will be considered a positive factor in determining potential penalties in decisions of criminal prosecution.

It is critical that we continue to protect whistleblowers from retaliation from their employers and those with interest. With effective controls in place, whistleblowers should become less common; however, they will always be necessary to keep companies in check. It is a promising that our country continues to protect whistleblowers through legislation and regulatory oversight.

For a large or small corporation, executives set the tone for risk management and compliance. A strong approach towards effective compliance programs is for companies to advertise them and for their executives to publicly acknowledge the  importance of compliance with state and federal regulatory laws. This may include a reward for employees who report ethical issues before they become an issue.

The goal for a company’s compliance program is to identify wrongdoing early on and adequately keep such actions from occurring again through effective controls. Without an adequate compliance program, a whistleblower can become the next best tool to ethical decision making. When leadership emphasizes strong compliance and risk management, it exhibits a culture of ethical decision making which will lead to a promising future.