By Staff Report Thursday, February 2nd, 2012

By Steve Mintz on February 3, 2012

Is it right to spy on an employer and violate one’s confidentiality obligation in order to be financially rewarded for blowing the whistle on corporate wrongdoing? This is an important question from an ethical perspective in light of the greater acceptance by society of those who blow the whistle in part due to the increased level of fraud in government contracts and Medicaid programs, and fraudulent financial statements.

Estimates range from $60 – $80 billion worth of fraud in Medicare based on $528 billion of Medicare spending by the government in 2010. The government is actively seeking to recover fraudulent Medicare payments by encouraging employees to blow the whistle on illegal billing practices. It’s not just Medicare. Whistleblowing has come to the forefront since the early 2000s because investors have lost billions of dollars due to accounting fraud, and homeowners have watched home values fade away because of the financial meltdown of banks and other financial institutions.

Fraud against the government may lead to whistle-blowing under the Federal False Claims Act. The Act imposes liability on persons and companies (typically federal contractors) who defraud governmental programs. Under the FCA the Department of Justice is authorized to pay rewards to those who report fraud against the federal government in an amount of between 15 and 30 percent of what it recovers based upon the whistleblower’s report. The FCA was the government’s first attempt to incentivize whistle-blowing.

Additional laws have been passed in the last few years in response to accounting fraud at companies such as Enron and WorldCom and unethical practices by banks and financial institutions related to subprime mortgages. The Sarbanes-Oxley Act of 2002 protects whistle-blowers that report financial wrongdoing from retaliation by their employers including loss of job or other discriminatory employment actions.

The Dodd-Frank Financial Reform Act that was signed into law by President Obama on July 21, 2010 allows whistleblowers to report a possible violation of the federal securities laws (including any rules or regulations) that has occurred, is ongoing, or is about to occur. The whistleblower must have a “reasonable belief” that a violation has occurred or is about to occur by possessing specific, credible, and timely information.

Dodd-Frank also incentivizes whistle-blowing by providing awards when a whistleblower voluntarily provides the SEC with original information that leads to the SEC’s successful enforcement of a federal court or administrative action in which it obtains monetary sanctions greater than $1 million. Under Dodd-Frank, an individual whistleblower may be eligible for an award of 10 percent to 30 percent of the monetary sanctions. Critics have called it the “bounty hunter” provision.

Closer to home, Amgen, a Thousand Oaks-basedcompany that is a leader in biotechnology, announced on Oct. 24 that it had set aside $780 million to settle various federal and state investigations and whistle-blower lawsuits accusing it of illegal sales and marketing tactics of the anemia drug, Aranesp. To better market the drug, Amgen allegedly overfilled vials of Aranesp, thereby providing doctors with free amounts of the drug to give patients and then charge to Medicare, Medicaid or private insurers. Millions were overbilled for this purpose.

In one lawsuit that was filed five years ago, Kassie Westmoreland, a former employee, charged that Amgen tried to persuade doctors to use Aranesp, rather than Procrit, a rival drug sold by Johnson & Johnson, by pointing to the extra profits the doctors could make by using the overfill and billing for it. The lawsuit filed under the FCA also alleged that Amgen offered kickbacks to doctors in the form of fictitious consulting arrangements and weekend getaways in order to steal market share from Johnson & Johnson. The federal government declined to join the lawsuit, but more than a dozen states did join, including New York and California. Westmoreland could be entitled to part of any settlement under whistle-blower statutes.

Legislative support for whistle-blowing may serve as a deterrent to fraudulent practices. On the other hand it could lead some employees to spy on company actions, aggressively trace questionable transactions, and gather evidence of wrongdoing even if it has nothing to do with that employee’s job responsibilities. From an ethical perspective this would be wrong as it violates the loyalty obligation of an employee to the employer, although instances exist where other ethical values trump loyalty as discussed below.

Do the ends of stopping fraud and other wrongdoing justify the means of potentially spying on one’s employer? After all, whistleblowing is a drastic step to take. In certain cases I believe the ends do justify the means if we are to stem the rising tide of corporate fraud that has occurred during the past twenty years and its massive cost to society. Recently adopted laws attempt to level the playing field of corporate wrongdoing and provide the counter-balancing effect of knowing a company’s actions are under scrutiny by those in the know — employees who are well meaning.

I believe whistle-blowing is an ethical practice when there is clear evidence of significant, preventable harm to the public, and the whistle-blower has exhausted all internal avenues to effect change. Moreover, a whistle-blower who is complicit in the wrong doing has a moral obligation to help right the situation.

It is not the whistle-blowing in itself that creates the deterrent. The possibility that the whistle will be blown has always been a reality for companies. In this case the deterrent is created by the knowledge that employees stand to benefit financially from uncovering corporate wrong doing and therefore they may be proactively looking for opportunities to inform outside authorities.

What about loyalty to one’s employer and the organization? Loyalty is an important virtue, but it should not be used to justify silence when the public good is at stake such as when public resources are being used for illegal purposes including fraudulent Medicare billings; fraudulent financial statements that lead to manipulated stock values; or when banks and financial institutions knowingly make loans to non-credit-worthy borrowers because the banks can transfer risk to someone else by selling off the loans to third-party investors.

The harm a company does to a community with unlawful practices outweighs the harm an individual does to one’s employer by blowing the whistle after attempting to right the wrong through internal means. If it takes a financial award to bring instances of illegal business practices and financial fraud to the attention of the government, then I believe it is an ethically acceptable practice as long as the whistle-blower, first and foremost, is motivated to act in the public interest and with the intent to right a wrong.

 • Steve Mintz is a professor of accounting in the Orfalea College of Business at Cal Poly San Luis Obispo. He blogs about business issues at www.ethicssage.com and www.workplaceethicsadvice.com.