In the Trenches: Acme fires whistleblower instead of fixing problem

May 21, 2007
An acme employee alerts upper management of a pricing scheme within the company that cost clients millions annually. Instead of investigating the accused, Acme demoted and eventually fired the accuser.

Acme completely filled a niche market with a string of service contracts it inked with manufacturers across the greater metropolitan area. While many competitors considered their claim that “no job is too small” was a powerful strategic marketplace advantage, Acme topped it with a claim that “no job is too off-the-wall.”

Over the years, Acme has courted, won and kept what might be called an “interesting” group of clients. They bring odd, many times ad hoc, requests for services. Some have work that needs to be done immediately, perhaps in response to a hazardous chemical spill or catastrophic mechanical failure. Some want Acme to perform extraordinarily risky, dangerous work. Others bring some highly irregular, one-of-a-kind task. Some have urgent work that requires Acme to commit the bulk of its resources right now, which results in putting ongoing work for other clients on temporary hold. These latter situations raise scheduling problems and have the potential to irritate anxious clients whose once equally important work now has been suspended. It’s an Acme balancing act that can have financial ramifications.

The atmosphere in Acme’s customer service department is hectic and, because of the need for timely responses, most client communications are conducted via e-mail and other high-tech channels. In this nearly paperless environment, Acme’s three customer service reps receive client requests and key the relevant information into a custom database that feeds an automated work scheduling module. After a minor bit of manual analysis and shuffling to level the workload for the various field crews, the reps price the proposal. Then, they prepare a formal scope of work showing exactly which tasks Acme would perform, those that are to be performed by others, and exactly when the work will be started and completed. Finally, the scope of work, the proposal price and the standard boilerplate documents are returned to the client over a secure Web link for acceptance via the same channel. All this takes place within a few hours of the initial request for proposal.

Of course, the labor involved in preparing proposals and cost of operating the high-tech service center are rolled into the lump-sum price that Acme submits. If the customer service reps spend too much time trying to make sense out of the material a client submitted, the process slows to a crawl and backlogs increase. It’s another variable that can have financial ramifications for Acme.

To make its process go as smoothly as possible, Acme makes it possible for clients to submit the necessary information in a standard format that meshes neatly with the Acme work routine. This makes it easier to prepare a timely response, which Acme touts as a high-tech way for clients to save money.

Acme’s Web site allows clients to input their work request information to an automated proposal handling system. Using this avenue merits Acme’s standard pricing schedule. Some clients preferred to use e-mail, so Acme published a set of guidelines on its Web site for them to follow in preparing a request for proposal. This class of submittals is subject to a surcharge because of the extra handling required in the Acme office.

Acme’s price hinges on details about the client’s timing, scope of work and method by which the request was submitted. But, the reps exercise certain discretion in how they price the proposals.

It was that unbridled freedom that came to the attention of Kelly Mann-Jarrow, a lower-level manager in Acme’s accounting department. Part of his duties included performing various perfunctory surprise audits of Acme’s operating departments. The objective of this exercise was to prevent any funny business by making departmental managers think the corporate honchos were taking a sudden interest in the way the department consumed Acme resources.

After reviewing his investigative data from the customer service department, Kelly concluded that something didn’t look quite right. Then he noticed a pattern. The reps were using the higher pricing schedule for every proposal, regardless of the manner in which it was submitted. True to his mandate, Kelly told the accounting managers that the customer service reps regularly overcharge clients that submit work requests through the Web site. Kelly could unambiguously document several million dollars of overcharges annually.

After it was clear that nothing was being done about his warning, Kelly dutifully sent several managers an e-mail that reiterated his findings and provided additional details about the pricing practices. The outcome of this move resulted in Acme assigning Kelly to the lightly-staffed night shift and giving him non-supervisory duties, such as sweeping floors and cleaning the lunchroom. Finally, his manager accused him of doctoring a subordinate’s timesheets by three minutes, ostensibly to prevent a key performance indicator for Kelly’s department from dropping below a targeted minimum acceptable value.

Kelly strongly protested this accusation. Then, Acme trotted out the subordinate, who, somewhat sheepishly, backed up Acme’s claim, despite the fact that an admission he wasn’t on the job when his supposedly doctored timesheet claimed he was working was, in itself, grounds for termination. Instead, Acme terminated Kelly for falsifying documents while claiming that blowing the whistle on a pricing scheme was irrelevant.

How could this situation have been avoided? Is Acme’s practice of not delivering the touted savings illegal or unethical? Is it politically savvy to point out an operational error, the fixing of which diminishes revenue? Is it ever possible for in-house auditors to avoid conflict-of-interest allegations? Is there any way to control pricing for highly customized work? Are punitive job assignments ever justified? What legal recourse does Kelly have?

A corporate consultant says:

Acme's practice is clearly unethical.

Kelly had three choices: ignore the problem, document the notification of his boss without taking any further action, or persist in attempting to force the company to correct its unethical behavior. Although two of these choices may be politically savvy, only one prevented Kelly from being complicit. The problem is, once Kelly made the right decision, he didn't execute wisely.

Kelly left himself wide open for what happened in this case. He failed to comprehend the significance of his managers' lack of response to his initial notification. Once it was clear that the accounting managers weren't taking action on Kelly's discovery, he broadened his audience to their peers when he should have broadened his audience upward. Kelly should have written a memo to his managers, with a copy to the president, reiterating the content and dates of his conversations with them. Assuming Acme's president wasn't involved in the unethical behavior, this would have neutralized his managers' power to take punitive action against him. If the president was involved, the receipt of such a letter should imply that Kelly had yet another hard copy of the letter outside the office.

The question isn't whether ethical auditors can avoid conflicts of interest; they can't. The question is how they handle such situations – and auditors had better know the answer to that question before the first conflict of interest ever occurs.

Other issues that present themselves in this case involve pricing discretion and punitive job assignments.

Custom shops need to be allowed to align pricing with the requirements of each job, and great salespeople need to be allowed some pricing discretion. However, the more discretion the organization permits its employees, the greater the risk of someone taking the privilege too far. Kelly's ability to document abuses for multiple years indicates that Acme didn't clarify any limitations, and didn't impose sufficient scrutiny on its processes to cause unethical practices to be revealed.

Generally speaking, imposing punitive job assignments doesn't seem to be in anyone's interest. It seems reasonable to predict that employees deployed in this way will deliver suboptimal performance, exacerbating whatever undesirable results the organization is attempting to punish.

Francie Dalton
Dalton Alliances Inc.
(410) 715-0484
[email protected]

An academician says:

Whistle-blowing, as Kelly found out, is a risky business. I suspect that in the majority of cases, the whistle-blower gets punished. Sherron Watkins at Enron had her computer confiscated, was moved to an area away from the other accountants, and was reassigned to another internal position. Often the whistle-blower gets fired, as was the case of the two employees who discovered that Krieger Enterprises in Minnesota was looting supplies that were to be shipped to New York for 9/11 relief. Bottom line, whistle blowing is high-risk and politically unwise, at least if one looks at the consequences.

Was Acme acting illegally or unethically in charging the higher price? I would say yes to both, particularly if the pricing policy was advertised. To charge higher than the advertised or quoted price is fraud. And it was the manager of the customer service department who had the responsibility to monitor the prices being charged in that department. The manager should have conducted periodic reviews of the pricing to make sure the reps weren’t over- or under-charging customers.

Could this problem have been prevented? Definitely, start by charging the correct price. Pricing policies aren’t that tricky, even for customized work. Companies do it thousands of times every day. But you need a set of rules to arrive at the price. Acme either didn’t have a clear set of rules, or the reps and the manager chose to ignore them. I suspect the reps got overloaded with work and played it safe by always charging the top price.

Finally, auditors (in or outside the company) always face a conflict of interest. Consider Arthur Andersen and the Enron problems. The key is the internal policies regarding audits. Many companies have formal and effective policies for handling audit reports so that they aren’t ignored and problems are quickly corrected. Acme needs to put those policies in place.

Professor Homer H. Johnson, Ph.D.
Loyola University Chicago
(312) 915-6682
[email protected]

An attorney says:

Since nothing in this vignette suggests Kelly is other than an employee-at-will and there’s no indication that he belongs to any minority group protected by law, he may have some difficulty challenging his termination.

Most states recognize a cause of action for a discharge that violates public policy. However, informing company officials that employees are overcharging customers isn’t the type of activity likely to be considered in violation of public policy.

Public policy claims gained judicial recognition in response to employers who were openly terminating employees for filing workers’ compensation claims. The courts recognized that employers couldn’t leave their employees with the “Hobson’s choice” of foregoing their right to file a workers’ compensation claim when injured at work or losing their jobs. Thus, the doctrine developed that an employer couldn’t terminate an employee for exercising a lawful right. A short time later, the tort was extended to other situations, such as employees who were terminated for exercising a legal obligation, such as serving on jury duty.

Some courts have recognized a claim for a discharge in violation of public policy when an employee is discharged for reporting the employer’s violation of a law. But in this case, Kelly blew the whistle on a practice that doesn’t appear to violate any law and a practice that may well enrich the coffers of Acme shareholders.

Julie Badel, partner
Epstein Becker & Green, P.C.
(312) 499-1418
[email protected]

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