From 2 July the gags will come off company whistleblowers as ground-breaking UK legislation will protect all employees from victimisation after reporting fraud and wrongdoing. Few argue that the new Public Interest Disclosure Act is anything other than a good thing. But then again, few have heard of it.
Under the provisions, companies face unlimited compensation claims from unfairly-treated employees and serious sanctions if corruption is covered up. The aim is to nip fraud – which costs public and corporate purses billions of pounds each year – in the bud.
The main problem is that many companies and public-sector bodies – which lose an estimated £8bn to fraud and corruption each year – are unaware of the legislation despite the threat of hefty compensation claims and high-profile cases of whistleblowing. Earlier this year Paul Van Buitenen, an internal auditor at the European Commission, was removed from his post as his revelations of fraud prompted the mass resignation of 20 commissioners in March.
Buitenen is still suspended from work and faces fresh disciplinary action if he makes further disclosures about fraud and mismanagement.
Guy Dehn, director of Public Concern at Work, a charity which helps companies introduce whistleblowing policies, says the government has failed to publicise the Act, compared to other employee legislation such as the minimum wage.
‘The government has not spent any money promoting it and is letting business down,’ he says. ‘Employers are not aware of it and they face a rude awakening if an employee makes a protected disclosure.’
That is not a charge the DTI accepts, however. It counters by stressing that the government wholeheartedly supports the legislation and has secured the backing of the Trades Union Congress and the Confederation of British Industry.
A more serious charge – for the accountancy profession especially – is that the Act only applies to employees. Many in the profession – namely the thousands of sole practitioners – will not be able to claim the protection of the Act despite being ideally placed to spot fraud and mismanagement in its early stages.
Introduced by a backbench MP and taken up by trade secretary Stephen Byers, the Act covers everyone from company directors to trainees in business and civil servants. It is unquestionably the most radical employee protection of its kind and will introduce sanctions against the cover-up of malpractice – including fraud and health and safety breaches. It will also encourage whistleblowers to make disclosures to the police, the media and, if necessary, the Inland Revenue.
Complaints are made to an industrial tribunal but whistleblowers must have an honest and reasonable suspicion that wrongdoing has occurred.
A crucial part of the legislation is that employees can claim unlimited compensation. Apart from cases of race and sex discrimination, the existing limit for unfair dismissal is capped at £12,000. Unlimited compensation is vital, runs the argument, to reassure finance directors and other board members that they will be adequately compensated for refusing to lie down over worrying accounting irregularities. ‘We don’t want a financial disincentive not to blow the whistle because they think they will not be compensated,’ says a DTI official.
Though sole practitioners will not benefit, accountants both in practice and business will reap its rewards, principally in terms of protection when blowing the whistle on financial scandal. There has certainly been no shortage of those over the past few years as Big Five firms have faced hefty fines. And many are under investigation by the Joint Disciplinary Scheme, the profession’s policeman, in connection with accounting irregularities in clients.
In May, PricewaterhouseCoopers was fined £3.5m for ‘shortcomings’ in its dealings with the corrupt Maxwell empire. It could find itself in the hot seat again as the JDS restarts an investigation into the collapsed BCCI. Elsewhere, Arthur Andersen faces an investigation by the JDS over inflated sales figures at a former audit client, the DIY retailer Wickes.
Nevertheless, many accountants have concerns about the Act, particularly over the motives of the whistleblowers themselves.
‘I don’t think it will have a crucial effect,’ says Peter Clark, finance director of Conrad Advertising. ‘I think some people calling up will be motivated by revenge and personal motives. However, it might nip one or two scandals in the bud.’
Clark is also sceptical that the Act will give directors the confidence to stick their necks out over financial scams and irregularities. ‘People will either turn a blind eye or vote with their feet,’ he says.
Neil Chisman, finance director of hotel and casino chain Stakis and a non-executive director of Wembley plc, also gives the whistleblowing law a muted welcome. ‘Anything that encourages openness should be encouraged but there will always be disgruntled employees,’ he says. ‘The legislation sounds as though it needs fine tuning.’
One of the main challenges for companies is ensuring that they have proper complaint procedures. But confidentiality is often difficult when the whistleblower is working in the same office as the person masterminding the alleged fraud.
Alex Plavsic, a partner in KPMG’s forensic accounting department, recalls: ‘A whistleblower for a public-sector client had made a series of allegations involving fraud and malpractice,’ he says. ‘But as the whistleblower had a history of these issues they were dismissed. He was on his final warning before being dismissed. We found that most of his allegations had substance to them.’
Plavsic advises companies to draw up a set of guidelines for whistleblowing.
This involves knowing who to complain to and having the reassurance that the complaint will not just be rejected out of hand. ‘Most big companies say you can report allegations to your boss or someone in the head office. But someone in a subsidiary office won’t feel comfortable complaining to a nonentity in head office,’ he says.
Simon Bevan, a partner in charge of Arthur Andersen’s fraud services unit, also paints a worrying picture of bungled company investigations into allegations of fraud and corruption. ‘The UK has a terrible record of punishing the whistleblower because the investigation is handled without any sensitivity,’ he says.
Under the Act, sacked employees can demand their jobs back through an interim order. But Bevan stresses that many fraud investigations carried out by companies fail to pinpoint enough evidence to back up the allegations.
This makes the whistleblower feel intensely uncomfortable in the company and forces them to either transfer offices or leave. ‘People get to know about the allegation but it’s often not proved,’ he says.
But some UK companies are making an effort to become more open. One US-inspired trend being adopted here is the anonymous complaint hotline.
One advantage is that people receiving the calls can be trained to separate the potentially serious allegations from malicious ones.
By giving people the confidence and security to speak out, notwithstanding these concerns, the Act should prove to be an effective weapon in the fight against fraud and corruption. However, that requires people to know about its provisions and that will be the initiative’s greatest test.
HOW WILL THE ACT AFFECT THE PUBLIC SECTOR?
Public sector bodies could find themselves most affected by the requirements of the new Act. In a warning served at last week’s CIPFA conference, they were told they could face whistleblowing by employees on a massive scale if they fail to consider fully the implications of the new legislation.
Some £8bn of public funds is lost to fraud and corruption annually, and by encouraging more employees to voice their fears it is hoped the Act will reduce that staggering loss.
Tim Crowley, chairman of CIPFA’s anti-fraud and corruption panel, said: ‘The public sector is going to be particularly affected by the first round of publicity concerning new allegations. There is no obligatory requirement to have a whistleblowing policy in place. But it would be a very complacent organisation that did not look at what could happen if they failed to consider the implications’.
On its own, the Act is not statutory for councils. But measures being introduced in local government legislation will mean authorities must take on board the provisions it contains.
Crowley said that most public-sector organisations had no awareness about the Act due to poor publicity surrounding its emergence. As it started life as a backbench initiative, the Act cannot be publicised using taxpayers’ money.
Local authorities in particular seem unable to deal with fraud effectively.
Speaking to Accountancy Age, one district auditor revealed that in a series of meetings he held with councils in his jurisdiction, none was aware of the Act’s impending arrival. He added that District Audit had failed to inform its own staff of the arrangements they should make for disclosure.
To prevent whistleblowing, Public Concern at Work says councils should prove they take malpractice seriously. They should clarify the matters regarded as malpractice. And they should respect the considerations of staff raising such concerns.
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