Harvey Pitt, the former chairman of the Securities and Exchange Commission, has advice for companies setting up whistleblower systems in time for this year's Sarbanes-Oxley Act deadline: Don't be cheap. "Trying to do this on a shoestring will eventually wind up costing companies far more than doing it right the first time," says Pitt, whose Washington-based consulting firm, Kalorama Partners LLC, advises businesses on complying with government regulations.

Section 301(4) of Sarbanes-Oxley requires that audit committees establish procedures for the "receipt, retention and treatment" of complaints about accounting or auditing. What's more, the provision specifies that employees must be able to submit concerns anonymously.

Vendors, many of them start-ups, have rushed to offer help dealing with these new standards. The companies generally can provide a variety of ways for employees to lodge complaints, including 24-hour telephone hotlines, Web sites, e-mail, fax and mail. Some even are available to investigate employee claims or offer tracking software to prompt compliance officers to take action.

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According to Sarbanes-Oxley, companies must have a system in place by the first annual shareholders meeting after Jan. 15 and no later than Oct. 31. But since the legislation provides few specifics on how companies must comply, many questions remain on what adequate compliance should look like. For instance, who should review employee complaints–a company executive or an independent party? Right now that choice is left up to companies.

Pitt says companies with the cash should hire outsiders to field and review complaints since employees forced to use internal hotlines may fear reprisals. What's more, having management review allegations creates the possibility that those involved in a fraud may squelch them. Over the long run, Pitt contends that outside hotlines and investigations are more likely to prevent problems from blossoming into costly scandals.

When Waste Management Inc. started its Integrity Helpline hotline in 2001, it selected The Network Inc., a two-decade-old, Norcross, Ga. company, to run it. Although the hotline wasn't operational in time to prevent accounting malfeasance that cost the Houston trash hauler $457 million in a 2001 class action settlement, it now is saving Waste Management money preparing for Sarbanes-Oxley. Linda Lipps, WMI's director of corporate ethics, claims the company needed only to fine-tune its complaint categories to add "whistleblower protections" and "accounting irregularities" to comply.

Here's how Integrity Helpline works: Lipps is alerted when a call alleging accounting fraud is received. In turn, she passes the information on to the vice president of internal audit, the vice president of ethics and diversity and the general counsel, who then determine whether the complaint warrants further investigation by the internal audit committee and WMI's external auditors. In addition, call reports are sent quarterly to the internal audit committee and weekly to WMI's chairman.

Lipps' advice to those about to start the process: Talk to other companies about their experience with various vendors, and leave two to four weeks to test the system before rolling it out.

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