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SECT|ON IHREE INTERNAL CONrnOl Issuss

given "rnanagerial authority over Boeing employees,"2 including the company's inter- nal auditors. The SEC's rules for corpprate audit committees expressly requiie that a company's internal auditors be contr{lled by its audit committee.

Second, and more importantly, Neuinann and Tides questioned the overall integrity of Boeir'rgls control environment that h{d been established by the company's top **".u- tives. In particular, they charged that tlfrose executives were intentionally undermining the annual SOX-mandated assessmen]t of the company's financial reporting controkl Among specific allegations, the two iriternal auditors suggested that-Boein! .unug.- ment was "potentially misleading the fxternal auditors" by permitting company insid- ers to "change audit results," was "perrfritting other tampering with the official internal audit records," and had concealed "falled controls."3

Despite the concerns expressed b[r'Neurnann and Tides, Boeing management rated the company's internal contro{s over financial reporting as effective for the company's fiscalyears ending 31 Dec$mber 21006, and 2002 Likewise, for both years, Deloitte issued an unqualified opinio]n on Boeing's internal controls, meaning tf,ui the Deloitte auditors found no indic{tion olf one or more material weaknesses in those controls during either of those ybars.

Poper Tiger During the spring of 2007, Andrea Janies, a reporter for the Seattle Post-lnteltigencer, the city's oldest newspaper, began in]vestigating unpublished reports that Bleing, easily Seattle's largest employer, had $erious internal control problu-r. James con- tacted numerous Boeing employees,] includting Matthew Neumann and Nicholas Tides. Neither Neumann nor Tides ndecl to James' requests for interviews. The two men subsequently reported that, af the time, they had hoped to resolve their con- cerns regarding Boeing's control pro$lems internally. Both of the internal auditors were also well aware of a Boeing policf that "required employees to refer inquiries of any kind from the news media to the $ommunications department and also prohib- ited the release of company informati{n without prior review by that departrnent."

James went to Neumann's home ufrinvited in May 2007 and asked him to dis- cuss Boeing's internal controls and th$ company's compliance with SOX. Neumann agreed to speak with James. "[Neum{nn] described the pressure he felt to render positive audit results and detailed a t mereting where he and other IT SOX audi- tors expressed concerns over the rolf of PricewaterhouseCoopers contractors in audits of Boeing's internal controls." A]few days after interviewing Neumann, James e-mailed him an excerpt from the artfcle thart she intended to publish in the post- Intelligencer Neumann responded by fioting llhat the excerpt "looked good." Along with his response to James, Neumann]attach,ed an e-mail that he and other IT SOi auditors had been sent by a superior. Jnis e-mail reminded the auditors of Boeing,s policy regarding the release of informa[ion to tthe news media.

In July 2007, a week or so prior to Ja]mes' ar:ticle being published, Nicholas Tides contacted her. Tides was prompted td contar:t James by what he believed was an undeserved negative performance ev{luation that he had received for the second quarter of 2007. In his e-mail, Tides displosed the various concerns that he had pre- viously raised with his superiors regarlging Boeing's llrelated control weaknesies.

2. The following legal opinion is the primary so rce for tlris case: Tides and Neumann u. The Boetng Company, U.S. Court of Appeals for the Ninth Ci uit, 644 F.3d 809; 2011 App. LEXIS 8980. Unless indi-

taken from this source.cated otherwise, the quotations in this case we 3. J. J. Tollefsen, "Tides and Neum.ann u, The the U.S. Supreme Court," October 20i1.

g Com,oany, Petition for Writ of Certiorari filed with

e s a l s o vant to t

Post-|, ing's in 7. James per cont referred itors. In

I officer ( nal cont

Deloitte, m e s ' a r t ing's int Ived the rity hol

ing woul ihood th ause Del aterial w

Boeing

ng." To kespe

fforts to

r to the one or m lems in t ials to in itoring th rently ot Septemb s. During

a n d p ted duri

mployee nation, ified the

s been ifically, mation5

THg BoEtNc Coir,tpLlrry

r w a r d e d t o J a m e s c o p i e s o f v a r i o u s B o e i n ose vreaknesses. telligencer published the article coauthored bv

I controls, "Computer Security Faults put rnd trer coauthor described how the compan ls to protect its "computersystems against mani o a "threatening company culture,, that influen

interrnal Boeing e-mail that James had obtai FO) told certain subordinates that the perfor

was "unacceptable." James also reported th as aware that "many of Boeing's computer systr :le revealed that Deloitte had identified a

,,si

nal controls during each of the previous th ompany's failure to eliminate ,.database a

s." This pervasive control weakness created suffr:r significant asset losses due to fraud or t the company's financial statements would itte had concluded that the control problem di kness, the firm was able to issue an unqualif ls during each of those years.

person interviewed by James insisted that edying the persistent significant deficiency in in

sp<ikesperson also insisted that the compan te the company's commitment to i

n told James that in 200G alone the company ply with the SOX-mandated internal control in

for Tottling blicatlion of James' article, Boeing,s manageme e ennployees were communicating with jou company's internal controls. That suspicio

iate an investigation. During that investigatio computers and e-mail communications of N

er employees as well. r 20A7, members of the investigative team inte

ese separate interviews, both individuals ad iding her with company documents. After

g the investigation, including Neumann and eviev/ board voted unanimously to termina ich accompanied the termination notice delj

pecific company "PRO' [procedure] policies t ined that you created an unacceptabte liabi

u uiolated PRO-2227, Information protection. non-Boeing persons witttout foltowing appropri

approuals ond putting in place appropriate safeg

Lathrop, "Computer Security Faults put Boeing at Risk,"

polticy statement PRO-2227 defined ',Boeing informati by lloeing." Under this corporate policy, ,,all Boeing in

roprir:tary, confidential, and/or trade secret information.

documents that were

ndrea. James regarding ing at Risk,'4 on 17 July had failed to establish ulation, theft and fraud" d the vrork of its internal

, Boeting's chief finan- ance of the company's Boeing's external audi-

controls were failing." nificant deficiency" in years. That deficiency softwaLre development some level of risk that heft arrd increased the ontain material errors.

not rise to the level of d opinion on Boeing's

he con,rpany was work- nal controls identified

's overall controls were

ng its internal controls, spent $55 million in

iatives.

t had come to suspect lists re,garding alleged had caused company

, maniagement began umann and Tides and

iewecl Neumann and itted to speaking with viewing the evidence ides' o,wn admissions, them. The following ered to each of them,

they had violated.

ity for t,he Company. discl<tsing Boeing

procedures, obtain- rds. In additton, you

ttle Post-lntelligencer

" as "ali nonpublic infor- ion is presumed to

), 17 July

that is ow iue and be

sEcTtoN THREE INrsRNaL CoNrnol Issuss

uiolated PRO-3439 by not referring inqui' from llhe neus media to Communications,

and by releasing information without rouol in accordonce with the requirements

of the sald PRO. YouY actions qre o ed by ,the fact thot the tnformotion had an

ad.uerse effect on the Company's reputoti' and iLts relotions with its employees, cus-

tomers, shoreholders, suppliers and Importont constituents, cousing stgnificont tor tn tilis incident as unacceptoble and in

1909.

Fighting Bqck in the Courts In late December 2007, three months alfter thely were terminated, Neumann and

Tides filed separate "whistleblower" (omplaints challenging their dismissals.

These complaints were filed under SOXlSection 806, "Protection for Employees of publicly triaeO Companies Who Provi$e Evidence of Fraud." In fact, at the time,

several federal statutes in addition to SQX provided protection for whistleblowers

that subsequently faced some type of retpliation by their employer or another entity'

The most plominent of these statutes arelthe False Claims Act and the Whistleblower protection Act that deal primarily with w$isttentowing incidents involving the federal

government or its agencies. les jin 2001 and 2AA2, Congress hurriedlyFollowing the Enron and WorldCom de

passed the SOX statute in an attempt to trengthen the nation's financial reporting

function and reduce the frequency of la cale corporate frauds that were under-

mining the credibility of the capital mar ets. Among the centerpieces of this legisla- public companies' internal controls and

lfability. The company deems your beha

uiolation of its expectot[ons as deftned in

tion were the SOX mandates to strength to provide more transparency regarding was manifested principally by requiring

Section 301 of the statute requires audit procedures for processing "complaints .

hose controls. This enhanced transparency :orporerte management teams and indepen- ffectiveness of public companies' financial

. regarrling accounting, internal accounting n also mandates that public company audit

dent auditors to annually report on the reporting controls.

Not nearly as well publicized were t whistleblower mandates included in SOX. mitl"ees of public companies to establish

controls, or auditing matters." This secti committees establish procedures to p ide for the "confidential, anonymous sub-

mission by employees ... of concerns rding questionable accounting or auditing

matters." In addition, Section 806 of th federal statute provides legal remedies for nished after making whistleblower reports.employees who are fired or otherwise p

Two Strikes In February 2010, a federal district court ismisserd Neumann and Tides' whistleblower

immeitiately appealed that decision to thelawsuits against Boeing. Their attorney U.S. Court of Appeals. In May 2011, the llate court affirmed the lower court's ruling.

The appellate court ruled that the w istlebtowing protections included in SOX

Section 806 did not apply to the circu stancels surrounding Neumann and Tides'

dismissals. In particular, the court not that Section 806 provides for legai reme-

dies for corporate whistleblowers only hen thr:y are punished after communicating

complaints or other adverse informatio to one or more of the following three par-

ent aglency, the U.S. Congress, or a "personties: a federal regulatory or law enforc with supervisory authority over the em lovee (br such other person working for the

employer who has the authority to in tigate, discover, or terminate misconduct)."

Because Neumann and Tides had bee fired by Boeing for communicating adverse

dia, they were not entitled to legal remediesinformation to a member of the news under SOX Section 806.

rh d Th

rh bt

t h th

Se lar +

m

m e a n i n g Several g transpar tions wer d e c i s i o n . W h i s t l e b come of t a " c h i l l i n ers in the Court's

w si

n corporate whistleblow- that publicatio

review Neuma nent business p g e s t e d t h a t t h included in the tive and need to

ing complaints o n l y 3 1 7 h a d b complainants.s

6 , JJ. Tollefsen, 7. w 8 .

ional Whi

u m a n n ing's in e prob bt beca attorn

tect inv courts sh

e appell mann a statute

to dismi ext, the U . S , S U district a hy, a stro tor Leah

e public providin ns to co

THE,IloEri{c Coupaxy

nd I'ides' attorney argued before the appell rnal control problems to the news media was

s tcr the U.S. Congress since one or more e aware of those issues as a result of James' also argued that because the overall pu

aind other third parties from self-intereste Id interpret and apply the protections exten

r the statute as liberallv as possible. te justices seriously considered and analyzed Tides' attorney. However, because of the lac

rding the parties to whom corporate empl r complaints, the justices chose not to overtur

the lawsuits of Neumann and Tides. ttornrey of the two former Boeing employe

e Court asking that body to review the dec appellate courts. In that petition, the attorn

g proponent of extending legal remedies for c contlends that the "corporate codel of silence"

ompanies damages the integrity of the natio extensive legai remedies for corporate whist ter that code of silence.

cctde of silence' not only hampers inuestigat ongoing wrongdolng con occur with uirtuol i, e cocle of silence for inuestors in publicly traded market, in general, are serious and aduerse, ond

r 201I, t t h e p r i o and Tid t h a t t h o o u p s t h c y o n t dismav

A r e p r e wers Ce e Neuma effect"T uture. Ot ision an d o u t t

w w r # { { : } { f f i L } ' w I n O c t o Suprreme Court refused i n c l u d i n g t h e to review r u l i n L g s h a n d e d d o w n i n scandals, surfa Neuman ' whistleblower lawsuits, nalists reported

e r u l i n g s w o u l d s t a n d . a d v o c a t e f o r e n h a n c e d part of public corpora- by the Supreme Court's n t a t i v e o f t h e N a t i o n a l ter argued that the out- n-Tides case would have

er critics of the Supreme the earlier rulings in the

case poin t many large-scale frauds,

'i.des and Neumann u. The Boeing Comparry, Petition for rit of Cerrtiorari.

leblovrers Center, "9th Circuit Whistleblowers Barred f .whistle rs.ortJ, 4 May 2011.

them by corpor insiders or other parties. Following th

e court that disclosing equivalent to reporting mbers of Congress no

ghly publicized article. of the SOX statute is to corporate executives, d to c,orporate whistle-

he arguments made by of amLbivalence in the

may communtcate the lower court's deci-

s f i l e d a p e t i t i o n w i t h sions tranded down by quote<I Senator Patrick rporatel whistleblowers. hat is pervasive among 's capiltal markets and blowers is an effective

but al:;o creates a cli- The consequences of

nie,s, in particular, must be remedied.6

n r o n a n d M a d o f f S e c u r i t i e s ed onlly after persistent jour- allegations communicated to

S u p r e m e C o u r t ' s r e f u s a l t o a n d ' f i d e s ' c a s e . t h e p r o m i -

blicatj,on The Economlsl sug- w h i s t l e b l o w i n g p r o t e c t i o n s OX statute are largely ineffec- be strengthened. According to of nearly 1,900 whistleblow-

i l e d u r r d e r S O X b v m i d - 2 0 1 2 . n r e s o l v e d i n f a v o r o f t h e

3 2 5

Ec , "Saclied for Telling Tales," wwweconomist.com, 7 July

Talking to the Press,"

sEcTtoN THREE INTnRNRT- Corurnol IssuEs

S i m i l a r t o m a n y , i f n o t m o s t , c o r p o r a whit;tleblowers, Neumann and Tides had dif cult,/ obtaining jobs after they were dismisse by tlheir employer. In May 2011, their attorn noted on his website that they "both are final w o r l k i n g a g a i n , b u t a t s i g n i f i c a n t l y r e d u c salaries."9

W h e n a s k e d t o c o m m e n t o n t h e B o e i n whisitleblowing incident following the dismiss{l of Neumann and Tides' lawsuit, Andrea Jam

Quesfions 1. The COSO internal control fram identifies five internal control

components. Which of those com nts iis most relevant:to the procedures that SOX mandates public compani s establish to enable, if not encourage, whistleblowing by corporate empl s?

2. Explain the difference between a " gnificant deficiency" and "material weakness" in internal control. Provi e an example of each.

3. Assume that the PwC contract audi rs did, in fact, exert "managerial authority" over Boeing employees? What inte have posed for Boeing?

I control problems or issues would that

e:rpressed regret that they were fired as a result of her newspaper article. "lt is hard for me to t a l k a b o u t b e c a u s e I f e e l b a d . A n d . . . t h e r e ' s nclthing I can do."10 James also revealed that her article was based upon "discussions with dclzens of people"1l and she was unsure why Neumann and Tides were singled out for pun- ishment by Boeing. "That's always puzzled me. But it's clear that they [Boeing] made an exam- plre out sf 1[gp."12, 13

4 .

5 .

rwise inappropriate for Neumann and their concerns regarding Boeing's IT itors'? Explain. Assuming that Neumann

and Tides had done just that, how

Why do you believe that SOX does

ould the Deloitte auditors have responded?

ot provide legal remedies for corporate whistleblowers who are punished members of the news media?

their employers after communicating with

6. Was it ethical for Boeing to monitor he cornputers and e-mail of Neumann and Tides during the investigation to d rmine whether one or more employees were communicating with membe of the news media? Defend your answer.

Would it have been unethical or ot Tides to have directly communicat controls to the company's Deloitte

9. P. Murphy, "Whistleblowers arrd Sa

10. Ibid.

tl. Ibid.

12. Ibid. 13. The Dodd-Frank Wall Street Reform and sumer Protection Act was signed into law in July 2010

the SEC to pay financial awards to whistleblowersby President Barack Obama. That statute "al who provide information that leads to a successf SEC enLforcement action with more than $1 million in sanctions" (K. Tysiac, "Hot Tips: SEC Fields 3,

www.journalofaccountancy.com, 15 November

Whistleblower Complaints in 12 months,"

ley Fallout," wwwtollefsenlawcom, 17 May 2011.

12).