SOX Whistleblower Rules Get First Test
Small-town bank in rural Floyd, Va., ordered to reinstate CFO who raised accounting and reporting issues.
by Rick Telberg/At Large
In what some say may be the first test of the whistleblower provisions of the Sarbanes-Oxley Act, a bank has been ordered by a judge to reinstate a sacked chief financial officer with back pay, interest and legal costs.
The story, largely overlooked until now, is all the more poignant because, while SOX was crafted with Enron, MCI Worldcom and Global Crossing in the headline, this cases involves the tiny Bank of Floyd in the farming community of Floyd, Va., and a CPA earning $60,000 a year, 49-year-old David Welch. The bank has barely 600 shareholders and the town has 432 residents.
To be sure, the case isn't over. The Bank of Floyd, a unit of Cardinal Bancshares, is appealing the Department of Labor's ruling from an administrative law judge and thoroughly denies any connection between Welch's firing and his issues with the bank's controls, accounting and reporting. The bank says Welch is simply inexperienced and mistaken.
The bare facts of the case may be fairly straightforward. Welch was working for the bank's outside auditing firm in 1999 when the bank said they'd be interested in hiring Welch as a full-time chief financial officer. Up until then, the bank's financial system was hardly state of the art; the head internal auditor, for instance had gone as far as Accounting 102 in college.
Welch, it seems, may soon have started rubbing people the wrong way, particularly president, chairman and director Leon Moore. In one case, a bank shareholder, an elderly woman who wanted to pay her electric bill, walked in to sell 26 shares. Welch said it was too close to the end of a reporting quarter for it not to smack of inside trading if a bank executive bought the shares. But Moore bought the shares.
In another instance, $195,000 came in from already-written-off real estate loans. Welch wanted it booked against the account for bad loans, but Moore insisted it be tagged as income.
One can only guess that things must have gotten ugly when Welch questioned the way Moore occasionally shifted his travel-and-entertainment expenses from one quarter to the next.
Meanwhile, the Sarbanes-Oxley act was being born. At one point Welch declined to sign off on certifying statements because, he said, entries were being made in the general ledger and other actions were taking place without his knowledge.
When a meeting was arranged for Welch to meet with the full board, he refused to do so without his personal attorney present. The board refused to allow the personal attorney to attend the meeting. He was put on paid leave, and then fired.
The bank notes in its defense that it has never been sanctioned or even been investigated by the SEC or banking authorities for Welch's allegations.
But the critical ingredient under SOX is that the case hinges not on whether Welch's allegations are correct, but on whether he "reasonably believed" unethical behavior was taking place, and whether the bank had punished him for voicing those concerns.
"Sarbanes-Oxley was expressly enacted by Congress to foster the disclosure of corporate wrongdoing and to protect from retaliation those employees, officers and directors who make such disclosures," the judge wrote.
