The Network, Inc.

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Attention: Jonathan G. Katz, Secretary

January 29, 2003

Standards Relating To Listed Company Audit Committees
Release Nos.:
33-8173; IC-25885
File No.:
Comments Due:
  February 18, 2003

Dear Mr. Katz:

We are submitting this letter in response to the request of the Securities and Exchange Commission for comments on the proposed rule to implement Section 301 of Title III of the Sarbanes-Oxley Act of 2002, and specifically the proposed rule on "Procedures For Handling Complaints" (II. C.). We applaud Congress' recognition of the necessity of offering employees and other stakeholders a credible means of reporting corporate fraud, and we appreciate the opportunity to comment on the proposed rule.

The Network, Inc. is the nation's first out-sourced employee "hotline", a toll-free telephone number that allows a caller to report misconduct anonymously. Founded in 1982, The Network helps more than 1000 companies, including many of the Fortune 500, collect and respond to employee feedback on business ethics issues such as accounting fraud, employee theft, discrimination, harassment, and violence in the workplace. Based on this extensive experience, we would like to offer some general observations, as well as some specific suggestions on the proposed rule.

General observations

The most common method for detecting corporate fraud is a tip from an employee, customer, vendor or another source: over 46 percent of workplace frauds are uncovered this way, compared to 30 percent that are turned up either by external or internal auditors.1 Thus, even without the legislative requirement, it makes business sense to devote resources to facilitating the anonymous reporting of complaints and concerns regarding corporate misconduct.

Our experience demonstrates that anonymity is very important to many of those who call with concerns: 48% of callers to The Network prefer to remain anonymous. However, preserving the caller's anonymity is only one aspect of building an effective employee complaint procedure. The procedure must be easy to access and use. Many companies have found that a telephone hotline meets these requirements. Their choice has been vindicated by the finding that having a hotline cuts fraud losses in half, 2 presumably because the tip provided earlier detection of the activity than other methods of detection. Although other anti-fraud measures, including internal audits, external audits, and background checks of applicants and employees, play a role in limiting losses, the hotline is the most effective in detecting fraud.

But the hotline must be more than just an answering machine. Employees are naturally reluctant to call from work - 41% of The Network's hotline calls come in at night or weekends - so it is important that the hotline be available round the clock, seven days a week. It is also imperative that the hotline is staffed by trained interviewers, who can probe for the details necessary to enable verification and a thorough investigation of the information given. A caller who is reporting accounting fraud is likely to be in a highly emotional state, and a trained interviewer knows how to keep the caller focused and ask exploratory questions to further document the allegation. The probing for details is what transforms a tip into an allegation that can be investigated, and this opportunity is lost without a trained interviewer.

Most importantly, the information provided must be seen to be acted on appropriately, or the complaint procedure will not be utilized, even though it guarantees confidentiality and is easy to access and use. This means it must be channeled to a level above that at which the alleged misconduct is occurring - in the case of accounting or auditing fraud, to the Board's audit committee. The only way to ensure this is to by-pass the roadblocks management might place in the way of free communication by out-sourcing the handling of complaints. One-third of The Network's hotline callers have already reported their concern through internal channels and were not satisfied with management's response. These callers were using the hotline as an accepted mechanism to bypass first-line managers to escalate their concern.

We believe these observations not only strongly support the Sarbanes-Oxley Act's complaint procedure requirement, but also point to the type of procedure that should be established by the audit committee to facilitate disclosure of potential problems before they have serious consequences.

Specific suggestions

Based on the observations discussed above, we urge the Commission to modify the proposed rule as follows:

1. The rule should list a telephone hotline as an example of a procedure for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

While we understand the Commission's reluctance to mandate specific complaint-handling procedures, and its desire to allow audit committees the flexibility develop their own procedures appropriate to individual circumstances, the evidence is clear that a telephone hotline staffed by skilled interviewers provides the most effective way of gathering sufficient pertinent detail while preserving the complainant's anonymity. For these reasons, we believe that the rule, while not mandating a telephone hotline, should list this channel as an example of an effective procedure for handling employee concerns in a credible confidential and anonymous manner.

2. The rule should require that the receipt and documentation of complaints be outsourced to a third party organization, and require this organization to send complaints of financial irregularities directly to the audit committee, to avoid the possibility of mismanagement of the complaints.

The proposed rule recognizes that "[m]anagement may not have the appropriate incentives to self-report all questionable practices [and] [a] company employee or other individual may be reticent to report concerns regarding questionable accounting or other matters for fear of management reprisal." It is exactly for these reasons that the receipt, , documentation and distribution of such complaints be taken out of the hands of management and placed in the hands of an independent third party organization. The rule should require that third part organization send complaints of financial irregularities directly to a member of the audit committee upon receipt. This will ensure that reports of accounting fraud reach the audit committee, and not be ignored or diverted. Third-party administration is also essential to preserve the confidentiality of the complaint, and protect the complainant from retaliation.

We would be happy to meet with representatives of the Commission to discuss our comments, or to share additional information regarding complaint handling procedures, if it would be helpful in your review of the proposed rule. Please do not hesitate to contact me at 800-253-0453, extension 5036 if you would like to discuss these matters further.


Tony Malone
Chief Executive Officer
The Network, Inc.

1 The Association of Certified Fraud Examiners' 2002 "Report to the Nation";
2 ACFE, see footnote 1 above. The median fraud loss for an organization with a hotline was $77,500, while the median loss where no hotline was in place was $150,000.