Trials of a CFO Whistle-Blower

In many ways, Dave Welch is Exhibit A in the debate over how well the Sarbanes-Oxley Act of 2002 can defend conscience-stricken employees.
Alix StuartMay 3, 2004

Fired from his job as CFO of Floyd, Va.-based Cardinal Bankshares Corp. and its subsidiary, Bank of Floyd, in late 2002 after refusing to certify his company’s financial statements, Dave Welch won preliminary orders from a Department of Labor administrative law judge in January to get his job back — along with lost wages, damages, and a clean employment record — in the first whistle-blower case to go to trial since the passage of Sarbox.

“When I refused to certify, I was just trying to get the ball rolling on some improvements,” says Welch. The former CFO says he raised concerns about several potential abuses to Cardinal chairman and CEO Leon Moore as early as 2001, but to no avail. Included in those concerns were improper journal entries amounting to $195,000, which led to a 14 percent net income overstatement, alleges Welch.

When he escalated the concerns through a series of memos and by withholding his signature from quarterly Securities and Exchange Commission filings for the small bank and its holding company, which trades over the counter, the audit committee hired its external auditor and an outside attorney to investigate the claims. However, he says, the team blocked him from meeting with the audit committee and rigged evidence to make him look incompetent. “[They] misconstrued everything I said and never presented my memos,” he argues. Within weeks, Welch was out of a job.

For its part, the bank claims it fired Welch because he refused to comply with the audit committee’s direction to meet with its representatives without his personal attorney. Cardinal claims an outside attorney would have violated the company’s need for confidentiality. “David Welch was not a whistle-blower,” says Laura Effel of Flippin Densmore, an attorney for the company. “If he had come to the audit-committee investigators…he would have been protected. But that’s not what he did; he said, ‘I’m not going to come and tell you unless I can bring my lawyer.’ “

Based on minutes from an earlier audit-committee meeting that indicated plans to fire Welch before his refusal to appear without an attorney — as well as the short time that elapsed between Welch’s memos and firing — administrative law judge Stephen L. Purcell found Cardinal’s argument “simply unconvincing.” (A year-end restatement of the numbers that Welch had questioned in 2001 also helped make his case, although Purcell insists that whether Cardinal is actually guilty of accounting fraud “is not, and never has been, at issue in this case.” He says that all Sarbox requires is that an employee “reasonably believed” such fraud was occurring.) As a result, he recommended that the DoL issue orders for Welch to return to his job at Cardinal.

Yet Welch continues to work at his new job, managing a group of physicians’ practices in a town several hours from his home. Cardinal has begun a review and appeals process that allows it to delay rehiring him and could last several years. The monetary awards he stands to gain have not yet been quantified. As a result, Welch looks to the future with a certain amount of trepidation. “I would feel a responsibility to go back [if the judge’s order becomes final],” he says, “but it would be difficult at best.”