Human Resources managers should never underestimate the importance of their role in Sarbanes-Oxley compliance. Too often, publicly-traded companies focus their Sarbanes-Oxley compliance efforts on financial reporting only, i.e., as a function of the Accounting and Legal departments. But the full participation of Human Resources can be critical in the corporation's efforts to comply with SOX.

Why Personnel Policies Matter

Human resources are indispensable assets in all corporate business organizations, and HR's core functions of systematically hiring, training, and disciplining employees are a critical part of the "internal control structure" required by Section 404 of SOX. Section 404 requires companies to protect corporate assets and to prevent exposure to risks that are a threat to those assets. And adequate protection of corporate assets necessarily requires HR's efforts to minimize the company's exposure in all types of employment lawsuits.

HR can also protect corporate assets by negotiating employment agreements with non-disclosure provisions and covenants not to compete to protect the company's trade secrets and other confidential information and discourage employees from leaving to use their skills, knowledge and client relationships for the benefit of competitors.

Personnel policies implemented by HR in coordination with the company's Information Technology department can further ensure compliance with Section 404 by protecting the corporation's electronic information. For operational purposes, electronic data may be the most valuable asset a company has, and, in litigation, may be the only evidence available to protect the company from a financially disastrous result. In many companies HR also reviews and approves employee expense reports, the abuse of which may be evidence of more widespread financial fraud.

Complaint Handling

HR should be directly involved in compliance with the provisions of Section 301 of Sarbanes-Oxley which requires the establishment of procedures for the "reception, retention and treatment" of corporate fraud complaints. Ordinarily, this is done by the use of a telephone "hot line" through which such complaints can be made confidentially and anonymously.

Human Resources should be notified of claims which are reported through these procedures. And the whistleblower provisions of Section 806 of SOX are typically the province of Human Resources, which ordinarily will investigate, in coordination with Legal Department or outside counsel, claims of retaliation against who report conduct suggestive of fraudulent accounting practices.

Retaliation

Section 806 of SOX is an especially dangerous retaliation statute because in some circumstances it requires the Department of Labor to order preliminary reinstatement (i.e., reinstatement before the employer has had a hearing on the merits of the claim before an administrative law judge) of an employee who has made charges of corporate fraud and who claims to have been fired in retaliation for making such charges.

Even if the allegations of fraud made by the whistleblower are ultimately shown to be inaccurate, such a reinstatement order, entered before all the facts are known, can significantly damage the image of the company with shareholders and the investing public, threatening the underlying value of the company's securities. To counter this threat, Human Resources should provide training to ensure that all employees understand the procedures through which they may present complaints of financial fraud without fear of retaliation, and that all supervisors understand that retaliation against employees who present such complaints is categorically prohibited.

Other SOX Requirements

Typically, HR is the department best qualified to ensure compliance with numerous other provisions of the Act. For example, it is Human Resources which is ordinarily called upon to establish or revise a corporate code of ethics to comply with Section 406 of SOX. Under this SOX provision, the company's ethical code must apply to all principal financial and accounting officers and include: 1) reasonable standards for handling conflicts of interest; 2) a requirement that financial reports be "full, fair, accurate, timely, and understandable,"; and 3) a requirement of full compliance with "all applicable governmental rules and regulations."

In addition, HR should monitor retirement plan activities and corporate loan programs to ensure compliance with Section 306, which prohibits insider trading during retirement plan blackout periods, and Section 402, which prohibits certain personal loans or other extensions of credit to directors and executive officers.

Finally, it is the responsibility of human resources managers to ensure that training is provided to protect the company and its employees from potential criminal liability under the provisions of Sarbanes-Oxley. For individuals, convictions under the Act can result in prison sentences of from 10 to 20 years, not to mention financially devastating fines that can be imposed upon individuals as well as the organization itself.

These provisions include Section 802 of SOX, which prohibits the destruction, alteration, or falsification of records in corporate audits, bankruptcies and federal investigations; Section 904, which significantly increases the criminal penalties for violations of ERISA; Section 906, which provides criminal penalties for executives and financial officers who falsely certify the accuracy of reports provided to the SEC; Section 1102, increasing the penalties for record tampering and for obstructing, influencing or impeding an "official proceeding"; and Section 1107, which provides criminal penalties for retaliation against employees, including imprisonment for up to 10 years for interference with the "employment or livelihood" of persons who provide "truthful information" to "law enforcement officers."

And it should be noted that most of the criminal provisions of the Act can apply not only to publicly-traded companies and their employees, but also to private companies and individuals, as can the whistleblower provisions of Section 806, which in some cases may be applicable to "contractors" of, or "agents" for, publicly-traded entities.

Conclusion