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Talk, or Walk?

Employees who try to bring to light unethical or illegal practices by their employers are often criticized, treated like outcasts, fired, or worse.
Joseph McCafferty, CFO Magazine
October 1, 2002

Barron Stone doesn't like to be called a whistleblower. The CPA, who alleges that his employer, Duke Energy Corp., kept the price of electricity artificially high in the Carolinas with questionable accounting, says he prefers to be called an "informant." "The word 'whistleblower' has a negative connotation," he explains.

Indeed it does. Stories like that of Sherron Watkins, who has been praised for speaking out against fraud at Enron, are rare. More often, those who try to bring to light unethical or illegal practices by their employers are criticized, treated like outcasts, fired, or worse. "It almost always turns out badly for the whistle-blower," says James Fisher, director of the Emerson Center for Business Ethics at Saint Louis University. "Often they regret it. They lose their jobs, they have family problems, or they're shunted off to the side."

It's not surprising, then, that the most common reactions of those who discover dubious employer practices are to either leave or look the other way. And while the public has continually asked, "Why didn't anybody come forward?" during the recent scandals, the fact that so few did indicates that systems designed to protect whistleblowers often don't work.

Power Play
Stone's decision to blow the whistle at Duke was not an easy one: it took two years after first noticing what he calls irregular accounting entries before he came forward. "My wife was against it. She was afraid for my personal safety and the family's well-being," says the father of two. Although he says personal safety was never an issue, he was prepared for hostility. "If you go into it thinking people are going to pat you on the back, you are kidding yourself," warns Stone.

In its Duke Power unit, which runs its regulated utility business, Duke Energy is allowed to earn a maximum rate of return on electricity it sells — 12.5 percent in North Carolina and 12.25 percent in South Carolina. If the company is earning more than that, regulators can cut the rate it charges to customers.

Stone alleges that from 1998 to 2001, the company reclassified some accounting items to make its returns lower so state regulators wouldn't cut rates. For example, he says Duke often gets rebates from insurers of its nuclear plants based on safety records. Although the cost of the premiums is expensed to the electricity business, he claims the rebates — approximately $26 million to $30.5 million each — were not booked back to the same accounts. On a number of occasions, "they were booked below the line in a nonelectric account," says Stone. The moves, he says, kept Duke Power from exceeding its allowable returns and kept the states from reducing electricity rates. (CFO PeerMetrix: Look into working capital for the last three years at Duke and at its Richmond rival, Dominion Resources.)

In 1999, as accounting manager at the division level, Stone concluded that he had an obligation to address the issue. "I made a strong case [that the accounting didn't comply with generally accepted accounting principles]," he recalls. But Stone's superiors said that the decisions were final. "They never offered an explanation," he says.

In 2001, Stone reported the issue to state regulators, and to company officials through an anonymous compliance channel. And while his identity was supposed to remain anonymous to his superiors, he believes the information was leaked. "You find that you are never really anonymous," says Stone.

In response, utilities commissions in the Carolinas have appointed Grant Thornton to investigate if Duke used improper accounting to artificially keep returns low. And in February, Stone, who has worked for Duke since graduating from college in 1985, was forcibly transferred to a new job that he dislikes, and downsized from an office to a cubicle.

Duke says Stone has never been treated differently because he raised the issue. "Duke has a strong commitment to maintaining an open work environment and supporting the highest business ethics," says Cathy Roche, director of external relations at Duke.

A Matter of Ethics
As bad as things have worked out for Stone, at least he still has a job. Often whistle-blowers find themselves without one, as well as without future prospects. "The kiss of death for a career is to get a reputation as someone who is not a team player," says Fisher. "And whistle-blowers usually get labeled as troublemakers."

So why do they do it? "It's very easy to say to yourself, 'The company has taken care of me; I'm not going to rock the boat,' " says Stone, whose salary and bonus of $90,000 to $100,000 has remained steady despite his job change. "But does that buy your integrity? For me it didn't."

Personal ethics and integrity are really the only incentives to come forward. That was the case with Watkins at Enron. "A number of people at Enron knew what was going on, but they were making too much money to say anything," says Watkins's attorney, Philip Hilder of Hilder & Associates, in Houston. "[Watkins] has a strong sense of obligation and duty instilled at a young age," he adds.


Still, the fact remains that whistle-blowers have limited protections. "In these situations, the company has all the power," says Fisher. "They can marshal more resources." Further clouding the picture is that from outside the firm it's often difficult to tell if an employee has purely noble reasons for stepping forward.

The Sarbanes-Oxley Act of 2002 contains a few provisions intended to better shield whistle-blowers: it creates both a private right of action and a source of criminal liability. "It broadens the scope of potential criminal liability for individuals who take action against whistle-blowers," says Gregory Keating, a partner at Boston law firm Choate, Hall & Stewart. Already, though, the White House is pushing for a narrower interpretation of the law, and many insist that the new protections aren't enough.

Fisher, for one, believes professional organizations and trade unions should take up the cause of protecting whistle-blowers. And others argue that companies should encourage those with knowledge of wrongdoing to come forward. "The goal should be to create a mechanism for getting information forward and hearing about problems," says Keating. It just might be a company's best chance to avoid becoming the next big scandal.

Joseph McCafferty is news editor of CFO.

Acts of Conscience

The fates of recent whistle-blowers.

NameCompanyAllegationsPersonal OutcomeCompany Outcome
David ChaconSalomon Smith BarneyImproper IPO allotmentsLeft firm, filed lawsuit

Subject of congressional and NASD probes

Cynthia CooperWorldComMassive accounting fraudTalking to U.S. Justice Department

Forced into bankruptcy

Roy OlofsonGlobal CrossingRound-trip trades and improper accountingFired, filed lawsuit

Forced into bankruptcy

Barron StoneDuke EnergyImproper accountingForced to change jobs at Duke

Awaiting results of an audit

Sherron WatkinsEnronMassive accounting fraudTestified to Congress

Forced into bankruptcy

Source: News reports




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