With Enron and Worldcom collapsing amidst financial scandal, stock prices sinking and still more corporate investigations to come, corporate governance issues have received unprecedented attention. In response to mounting concerns about corporate wrongdoing, this summer President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”). The Act, among other measures, creates a federal accounting oversight board, strengthens penalties for corporate fraud and requires corporate attorneys to report situations involving fraud and misconduct.

While most attention to the Act has focused on the accounting and reporting obligations of public companies, the new laws have other provisions that will have a much more far-reaching effect on employers. Not only will these regulations change the way organizations will look at ethical issues in the future, but they also create new responsibilities regarding record retention and corporate whistleblowers.

Criminal Penalties for Record Destruction

While federal agency record keeping regulations have generally required the retention of many types of employment documents for three years, the Act is much broader and carries harsher penalties. The new law contains criminal statutes that forbid the destruction, alteration or falsification of records in federal investigations or bankruptcy, and applies not only to securities fraud, but to all federal investigations. Therefore, whether a business is being scrutinized by the Equal Employment Opportunities Commission, the Department of Labor, the Immigration and Naturalization Service or any other federal agency, it is equally important to be vigilant about proper record keeping.

The penalty for knowingly violating the record retention requirements of the Act can include harsh fines and up to 20 years’ imprisonment, so it is essential that every business develop clear record retention policies. These policies should specify requirements for handling and maintaining documents related to federal investigations, and be administered by trained individuals with sound judgment and decision-making skills.

Increased Whistleblower Protection

Prior to the Act, most federal and state whistleblower laws protected only those employees who complained about significant public health and safety issues. Whistleblowers who reported incidents of fraud were usually not legally protected from retaliation.

The Act creates a new civil right of action for employees of public companies. It allows an employee to sue to redress retaliation for providing information or otherwise assisting in an investigation involving corporate fraud or accounting abuses in investigations conducted by a federal regulatory or law enforcement agency, a member of Congress or Congressional Committee or a person with managerial authority within the corporation.

Employees can file civil complaints under the Act with the Department of Labor. Penalties can include reinstatement of employment, back pay with interest, and compensation for special damages, including litigation costs and attorneys’ fees.

The Act also establishes criminal penalties for retaliating against any employee who reports a criminal matter to local, state or federal law enforcement authorities. The penalties can include a fine and/or imprisonment for up to ten years. Unlike the civil remedies discussed above, the criminal penalties are not limited to actions involving publicly traded companies, or situations involving corporate fraud and accounting abuses.

Employers can best protect themselves from claims under these enhanced whistleblower provisions by taking steps to create an open environment where employees are free to voice their concerns, and by taking any concerns raised seriously. Show by example that retaliation or harassment will not be tolerated.

Making Ethics Everyone’s Responsibility

The Sarbanes-Oxley Act will probably not be the last piece of legislation involving business ethics and corporate accountability. All companies will need to prepare themselves to face continuing scrutiny in the years to come.

Before Enron and Worldcom, ethics was often the domain of one department—whether human resources, compliance or legal—and was not integrated into the minds and hearts of the organization as a whole. Today’s businesses can no longer afford to deal with ethics in a void. Although legal and human resources departments must continue to maintain a particular vigilance concerning ethical issues, all employees must be educated about what constitutes proper business conduct, and held responsible for pointing out violations that they may encounter.