Pitch heightens for whistle-blower system
What can junior employees in Hong Kong companies do when they suspect their boss has committed a crime? Until recently, not much, other than report their suspicions and risk being sacked. But that is changing.
Last week, a Hong Kong court heard the case of a KPMG manager accused of bribery, a case that arose from a subordinate blowing the whistle on what he suspected was illegal activity. The manager was acquitted on Thursday, but the whistle-blower system at the accounting firm worked as it was designed to.
In the United States, the Sarbanes-Oxley Act of 2002 required the audit committee of a publicly listed company to establish a 'complaint notification', or whistle-blower system, to allow employees or suppliers to report any malpractices.
Hong Kong has yet to require such a system, but last December, Hong Kong Exchanges and Clearing, operator of the local stock market, proposed something similar in its code of corporate governance practices. The HKEx said all listed companies should install a whistle-blowing policy to enable employees and other business associates to raise concerns to the company about suspected malpractices.
'We consider the audit committee the most appropriate committee to be responsible for an issuer's whistle-blowing policy,' the HKEx consultation paper said. 'We believe that an issuer should be able to define a whistle-blowing policy that is appropriate to its own circumstances, so we do not propose to define, in detail, the contents of its policy.'
The HKEx consultation ended in March but the exchange has not yet announced what comments it has received and it is uncertain whether the proposal will be implemented.
Paul Chan Mo-po, legislator for the accountancy sector, said that even though HKEx had not yet promulgated a new regulation, some accounting firms and listed companies in Hong Kong had already introduced a whistle-blowing structure as part of their internal controls.
'The whistle-blower system would be useful to allow a junior employee to report cases,' Chan said. 'But there can be abuses; for example, if some employees use it as a tool for revenge.'
Steve Vickers, chairman of Steve Vickers Associates and chairman of FTI Consulting, investigates corporate crime and offers a whistle-blower service to companies in Hong Kong. 'A whistle-blower system is a good tool to allow staff to report crime,' he said. 'But it would be useful only if the management of a company took appropriate action after receiving a report. It would not work if management receives a report but sweeps it under the carpet.'
But he, too, believes it is open to abuse. 'Some reports might be motivated by professional rivalry or spite over broken love affairs,' said Vickers. 'Angry staff could also use the whistle-blower system as a channel for revenge against their boss. Management has to be careful about how to handle information reported anonymously.'
The most recent, high-profile whistle-blower case in Hong Kong involved senior KPMG manager Leung Sze-chit, whose assistant, Suki Lau Shuk-ting, blew the whistle on Leung, suspecting her boss had improperly accepted HK$300,000 last February.
But last Thursday, District Court Judge Stephen Geiser acquitted Leung on two charges of accepting bribes for his auditing work on the initial public offering documents of mainland fabric-maker Hontex International Holdings.
The judge found there was reasonable doubt as to criminal behaviour, though he described Leung's behaviour in initially accepting the money as 'stupid and irresponsible'.
According to the evidence presented in court, both Leung and Lau helped prepare the Hontex listing documents. After the company's IPO on Christmas Eve in 2009, Chan Chau-wan, a consultant for Hontex, met Leung and Lau separately and gave them a combined HK$400,000 as lai see.
Lau urged Leung to return the money but he did not do so, according to the testimony. Lau then reported the matter to KPMG on the firm's online whistle-blower system. An internal investigation followed and the matter was reported to the Securities and Futures Commission, which later referred it to the Independent Commission Against Corruption.
The ICAC arrested Leung in April last year and he was charged with two counts of corruption but was acquitted last week. The judge noted that Leung and other colleagues had informed his supervisor Money Chow of the payment shortly after receiving the money, but Leung's boss gave no advice or direction on the matter. She first admitted the conversation in the KPMG internal meeting but in the court she claimed not to remember the conversation.
The judge called her a 'poor witness' and this doubt led to the acquittal decision.
Judge Geiser said that the lack of guidance affected Leung's behaviour in not reporting the incident or returning the money until later confronted by authorities.
The president of the Hong Kong Institute of Certified Public Accountants, Philip Tsai Wing-chung, said the whistle-blower system employed in the case was in common use in the accounting industry. 'The system is considered to be an effective tool to allow junior staffers to report alleged malpractices,' he said. 'It is a good internal control system for the accounting sector, which has to maintain a high degree of integrity.'
Jacqueline Wong, a partner in the quality and risk management practice of KPMG, said the whistle-blower system was administered by a third-party provider and was available to staff as well as clients, vendors and other parties to report concerns through a toll-free telephone call or a web-based form.
Employees can identify themselves or remain anonymous when making their report, she said. Either way, KPMG prohibits retaliation against anyone who, in good faith, makes a report. 'The whistle-blower system provides another channel for staff to report matters to the risk management department if the staff member feels uncomfortable reporting it through the normal communication channels,' Wong said.
KPMG used a third-party provider, she said, since an independent channel could better ensure the anonymity of people reporting their concerns. Third-party providers like ClearView Connects and EthicsPoint provide whistle-blower services for companies in various industries and countries. Employees could report through a free telephone hotline or web-based e-mail managed by the service providers. They could choose to be named or remain anonymous and they could use languages other than English.
Companies wanting to use these services pay an annual fee to the third-party providers, which, when they receive a report, route the information back to the person in charge of the relevant company.
Wong said reports received through the whistle-blower system were rare, as employees usually used the normal communication channels to report matters to their seniors.
'Overall, we have found the system to be an effective process and promote its use,' she said.