Here’s the scenario: A prominent high-level employee markets a tax shelter product that was developed, endorsed and approved by his employer, a major accounting firm. The company deems the tax shelter proper and legal. The government, however, believes that the shelter and the way it is being marketed may violate various statutes. So it conducts an investigation into the company’s activities.
Because the company has already vetted the tax shelter through the committee that approved the product, it decides to defend the shelter and taps the employee to make its case. The employee defends the company’s tax shelter product but makes some statements that expose the company to potential prosecution. Now the company decides that it must avoid potential criminal prosecution at all costs. And so it decides to completely change its strategy.
No longer will the company dispute or argue with the government. Instead, it chooses to cooperate fully. Cooperation means assisting the government, even if it means distancing itself from its employees. It means waiving attorney-client privilege, including turning over the results of an internal investigation and the memoranda prepared by the company’s attorneys performing the investigation, refusing to pay employees’ legal bills, possibly terminating employees unless they speak to the government and cutting off the flow of information to employees.
In short, the company gives the government full access to company records and investigation results. The final outcome: The company is favorably viewed as cooperating with the government, but its employees are exposed to criminal charges, or are fired by the company.
What ever happened to the age-old adage "If one goes down, we all go down"? Well, they all went down: Enron, WorldCom, Arthur Andersen, Tyco and so many more. With fraudulent conduct occurring at the highest levels and resulting in many corporate giants crumbling, companies have been scared straight and are now distancing themselves from employees.
After the downfall of Enron et al., Congress passed Sarbanes-Oxley. The measure was meant to help restore confidence in the financial markets by mandating that companies implement certain corporate governance procedures. For publicly traded corporations, the law meant stiffer penalties and required greater responsibility by audit committees, certification and ratification of financial statements by directors or officers of the company, and protections for whistle-blowing employees.
Recently, the government has ratcheted up the stakes by threatening criminal prosecution of companies and their officers. Because of these threats, companies have been forced to pay hundreds of millions in penalties, hire compliance and ethics officers and consider other options to avoid the company’s downfall. With the government’s relentless prosecution of these cases and the ever-increasing penalties, it is no wonder that companies recognize the importance of cooperating with the government.
Back to the scenario that opened this piece: It is no hypothetical. It depicts what happened to the accounting firm of KPMG and one of its now-former employees. Even though KPMG learned quickly that cooperating with the government would likely result in leniency for the company, it also became apparent that its former employee would face the brunt of the blame.
It may sound cold, but it’s entirely proper for a company to put its interests--and, ultimately, that of its shareholders--above those of its individual employees. Too many companies have fallen at the hands of one or a few employees. This cannot and should not continue to be the norm in corporate America. It isn’t in the interest of shareholders for a company to protect people who have committed improper acts. However, a company that suddenly decides to throw employees under the bus to save itself isn’t likely to be viewed as a model employer, either.
For a company to be fair to its employees, while also keeping its commitment to the highest corporate governance standards, it must first put employees on notice of one overriding issue: Company interests will supercede those of its employees, even if that means requiring employees to provide potentially self-incriminating information to the government. They must comply, or risk being fired.
The precedents for this kind of frank communication already exist: Companies communicate to employees their equal-employment policies, anti-sexual harassment and anti-discrimination policies and internal complaint procedures.
Perhaps companies should now have a disclosure statement on what will happen in the event of a government or company inquiry. As with other policies, it belongs in employee handbooks, and employees could be asked to sign statements acknowledging that they understand and agree that the company expects and requires that they will cooperate fully with any investigation or inquiry being conducted by the company or any governmental entity. Employees should acknowledge that failure to fully cooperate could subject them to discipline, including termination. The statement should set forth that the company would not consider reimbursing employees for legal expenses unless they fully cooperate.
Employees have a right to know what is expected of them. This straightforward disclosure removes any doubt about what a company’s position would be in an investigation. The employee would know that protection of the company’s interests is paramount.
The disclosure also places the burden on employees. Now they know they will be held accountable for their own conduct and must be willing to accept responsibility for such actions. Employees can choose to either blow the whistle on conduct they believe to be wrong or questionable, or they can engage in that conduct and face the consequences.
Regardless of the employees’ choices, the company has informed them that if there is an investigation, the company might not support them. If employees contend that they’re innocent, then they should be willing to cooperate with the investigation.
Ultimately, KPMG avoided criminal exposure by cooperating with the government. That meant that KPMG demanded that its employees voluntarily speak with the government, or face possible termination and the denial of payment of legal expenses. It meant KPMG refused to enter into an agreement with its employees to share information between the employees’ counsel and KPMG’s counsel in what’s known as a joint defense agreement. It meant that KPMG agreed to tell prosecutors which documents the employees were requesting to use in their defense, thus giving the prosecutors a roadmap to the employees’ defense strategies.
In light of these evolving defense strategies, the employer-employee relationship will surely be scrutinized. This evolution and re-evaluation of defense strategies has become a necessity in ensuring the survival of companies.
KPMG’s position, although aggressive, will likely lead to a new era of cooperation. But in order to be viewed as fair, a company must communicate its policies in advance to employees. Otherwise, the company will be viewed as throwing innocents (even if they’re not innocent at all) under that bus.
The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.
Workforce Management, March 2005, pp. 14-15 -- Subscribe Now!