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Legal Requirements for Ethics Programs:. Federal Sentencing Guidelines (1991)First to require formal company-wide Ethics ProgramsResults in reduction of fines and penaltiesResulted in creation of Ethics Offices in companiesResulted in explosion of Ethics TrainingResulted in explosion of Ethics
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1. The Enforcement of Ethics: An Update on the Federal Sentencing Guidelines and Ethics Office Requirements
Charles R. McGuire, J.D.
Illinois State University
2. Legal Requirements for Ethics Programs: Federal Sentencing Guidelines (1991)
First to require formal company-wide Ethics Programs
Results in reduction of fines and penalties
Resulted in creation of Ethics Offices in companies
Resulted in explosion of Ethics Training
Resulted in explosion of Ethics Consultants
Applies to FEDERAL law only
3. Legal Requirements for Ethics Programs Sarbanes-Oxley Act of 2002
Requires certification of financial reports by top executives
Increases penalties and prison terms for fraud
Establishes new regulations
Requires new reports to the SEC
Requires disclosure of Ethics Codes
4. Federal Sentencing Guidelines United States Sentencing Commission
An ongoing independent agency created in 1984
Establishes sentencing policies and practices for the federal courts
7 members, appointed by the President
Purpose in part was to “structure the previously unfettered discretion of federal trial judges” and to “target white collar and violent, repeat offenders” for more serious penalties.
5. U.S. v. Missouri Valley Constr. Co., (8th Cir., 1984) (Healey, J.) “The present practice of punishing corporate crime with fines paid to the U.S. Treasury has done little to deter corporate crime. Once the payment is made, the public promptly forgets the transgression, and the corporation continues on its way, with its reputation only slightly tarnished by what it usually describes as a “highly technical violation”
6. Organizational Sentencing Guidelines Most commonly apply to fraud, environmental waste discharge, tax offenses, and food and drug violations
Criminal liability can attach whenever an employee commits an act within the apparent scope of employment, even if directly contrary to company policy and instructions.
Sentencing Guidelines incorporate preventative and deterrent aspects of “systematic compliance programs”
Sentencing Guidelines mitigate the potential fine range – up to 95% in some cases – if there is “an effective compliance program.”
7. “Aggravators and Mitigators” Mitigators
Effective program to prevent and deter violations of Law
Self-reporting
Cooperation with authorities
Acceptance of responsibility
Aggravators
Involvement or tolerance of activity
Prior history
Violation of an order
Obstruction of Justice
8. Seven Criteria for An “Effective Compliance Program” Compliance Standards and Procedures
Oversight by high-level personnel
Due Care in delegating substantial discretionary authority
Effective communication to all levels
Reasonable steps to achieve compliance, including systems for monitoring, auditing, and reporting suspected wrongdoing without fear of reprisal
Consistent enforcement of compliance standards including disciplinary mechanisms
Reasonable steps to respond to and prevent further similar offenses
9. Usual Components of an “Effective Compliance Program” An Ethics Code
An Ethics Office, including high-level oversight
An Ethics Training Program
A “hot line” or “tip line”
Audit and compliance reporting
10. Ethics Codes: Best Practices Best when broad based;
No “one size fits all”
Should be continually reevaluated and rewritten (the “dusty and musty” problem)
Should evidence high-level commitment;
Should not be done entirely by either the lawyers (compliance) the accountants (audit) or the security group (internal security) but by all
11. Ethics Offices: Best Practices Need to be high-level (V.P.) with access to top management
Must be beyond reproach
Must be totally confidential
Must have internal investigatory powers at all levels
Should have an advocacy function within the company
Should be responsible for reporting
12. Ethics Training Programs Best Practices Involve all levels and employees of corporation
Based on Ethics Code
Involve a variety of internal programs and multiple delivery mechanisms
Should be strategic, rather than “canned”
Should aim at awareness, knowledge and skill-building, and reinforcement
13. Hot Line/Tip Line Best Practices “Customers or Employees or both?”
Confidentiality, confidentiality, confidentiality…. And security.
The problem of the anonymous informant
No retribution against whistleblowers
14. Audit and Compliance Reporting Best Practices Done by (or under the authority of) the Ethics Office
Include positives: Employee/customer surveys, customer satisfaction indices, trend lines, etc.
Make public
15. Impact of the Sentencing Guidelines: 500 Law Review Articles and 300 newspaper articles;
300 websites dealing with guidelines
18,381 articles on compliance programs;
Created new job description: The Ethics Officer
EOA: 750 Members. www.eoa.org
53% of those surveyed by EOA reported that the Guidelines had “a lot of influence” on their decision to adopt a compliance program.
16. The CareMark Decision Delaware Decision, 1996, a civil action for breach of fiduciary duties resulting from kickbacks and false claims
The Caremark decision expanded liability for board members and said that a corporate director has “a good faith duty” to see that ethics information and reporting systems are established in the organization.
Failure to assure that a corporate reporting and information system exists may render a director liable for losses causes by non-compliance
Court examined the compliance program and found that the directors would not be held liable SINCE AN EFFECTIVE COMPLIANCE PROGRAM WAS IN PLACE.
The decision has been cited numerous times in other cases.
17. Sarbanes-Oxley Act of 2002 Amendment to 1934 Securities Exchange Act
Passed to help bolster investor confidence following several corporate collapses
Provided for additional SEC rules to interpret and enforce the Act
18. Key Provisions of Sarbanes-Oxley Established Public Company Accounting Oversight Board
Prohibited registered firms doing an audit from non-audit services, including consulting
Required sign-off by CEO and CFO to certify appropriateness of financial statements
Required each annual report to contain an “internal control report”, which requires an “internal control structure.”
Requires disclosure of whether the firm has adopted a Code of Ethics, and rules require that the Code be filed with the annual report
19. SEC Definition of a “Code of Ethics” Written standards that are reasonably designed to deter wrongdoing and promote:
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest…
Full, fair, accurate, timely and understandable disclosure in reports….
Compliance with applicable governmental laws…
The prompt internal reporting …of violations of the code…
Accountability for adherence to the code.
20. EOA Survey -- 2000 Average number of contacts/year = 371
Full-Time Ethics Officer: 525
Average number of investigations/year = 59
Most Frequent contact categories (in rank order):
Conflict of interest
Misuse of resources
Discrimination
Outside business activities
Gifts and gratuities
Sexual harassment
21. Summary and Questions The Sentencing Guidelines and Sarbanes-Oxley should be read together
Ethics development must be an ongoing commitment
Ethics needs to be infused throughout the organization
The climate for ethics is strong… but cyclical.