Might the failures of Enron, Arthur Andersen, or WorldCom have been averted if people such as Enron's Sherron Watkins had enjoyed legal protection from retaliation for raising concerns about fraud against shareholders? The probability is slight. But the lack of protection for employees at companies committing financial fraud certainly conspired to prolong the public's ignorance about potential problems at these and other companies.

As a response to the massive erosion of trust in the stock market among individual investors, earlier this year Congress passed the Public Company Reform and Investor Protection Act, better known by the names of its sponsors, the Sarbanes-Oxley Act. (You can read the bill at the Library of Congress website. Enter S.2673 for the bill number.)

The regulatory and legal oversight aspects of the Sarbanes-Oxley Act, which impose new requirements on executives, boards of directors, accounting firms, and lawyers, have received the most attention. Some commentators believe that Sarbanes-Oxley may not accomplish the goal of restoring investor confidence through increased oversight and transparency.

However, I believe the true strength of Sarbanes-Oxley may arise from what I term "undersight" provisions, enabling employees at all levels inside corporations to raise their concerns about fraud, knowing that they have legal remedies if they suffer retaliation. Congress seems to think that the oversight and "undersight" provisions, working together, may bring potential problems to light faster, ultimately preventing Enron-like collapses and the resultant massive financial losses.

Not much attention has been paid to the significant civil and criminal laws protecting whistleblowers under the Sarbanes-Oxley Act. The Act clearly intends to empower whistleblowers to raise concerns about shareholder fraud by protecting them with the full arsenal of the civil and criminal law. It also creates a new federal right of action in favor of employees of public companies who are retaliated against for raising concerns about shareholder fraud, with reinstatement, back pay, compensation for special damages, and attorney's fees available if they win their cases.

More importantly, Sarbanes-Oxley criminalizes whistleblower law by creating a new federal crime, punishable by up to 10 years in prison, for retaliating against any employee (of publicly traded or privately held companies) who reports concerns about any federal crime, including crimes related to shareholder fraud, to the appropriate law enforcement authorities.

I personally believe that the criminal penalties are an overreaction by an angry Congress and should be partially repealed, but for now, Sarbanes-Oxley is the law of the land. Also, Sarbanes-Oxley facilitates employee whistleblowing by requiring Audit Committees of Boards of Directors to implement mechanisms for receipt of anonymous employee concerns regarding financial issues.

Wall Street is not immune to Sarbanes-Oxley, either, as it forbids brokers and dealers from retaliating against analysts who issue unfavorable research reports. At one stroke, Sarbanes-Oxley enables employees to play a role in ensuring that their companies' financial reports are accurate, by means of "undersight" by employees inside corporations, rather than oversight by directors or agencies outside corporations.

The whistleblower aspects of Sarbanes-Oxley are a significant departure from prior federal and state law. Until now, most federal and state whistleblower laws have protected only employees who raise concerns about public health or safety, which are issues of compelling public concern. In contrast, employees of publicly traded companies who complained about shareholder fraud enjoyed little or no legal protection, because such issues had not been perceived as directly affecting the public welfare.

With the collapse of several large businesses, and the ensuing financial losses suffered by millions of investors and employee shareholders, Congress has concluded that fraud against shareholders is an issue of serious public concern sufficient to justify new civil and criminal protections.

Should investors have more confidence in the markets because whistleblowers enjoy these new legal protections? It remains to be seen how much energy the federal criminal authorities will devote to enforcing the criminal aspects of Sarbanes-Oxley. Even if the criminal penalties for retaliating against whistleblowers under the Act are rarely invoked, private attorneys may actively pursue the civil remedies available under Sarbanes-Oxley because of the damages and attorney's fees available to prevailing whistleblowers. These provisions may embolden employees to raise concerns that would not have been voiced without such protection.

Ideally, such whistleblower protections will simply create for businesses an additional hazard before they commit fraud, a group of people who have intimate views into many corporate activities. Any corporation, whether publicly traded or privately held, would be well advised to implement policies to handle whistleblower allegations in ways that may help avoid litigation, and such policies may have beneficial side effects on financial reporting. Of course, only time will tell whether these provisions achieve their purpose of causing employees to raise their concerns about potential fraud against shareholders, with the result that financial reports of corporations become more transparent.

Morality cannot be legislated, goes the famous dictum. The oversight aspects of Sarbanes-Oxley may or may not prove to be effective in diminishing investor skepticism about corporate financial reports. There may be limits as to what can be accomplished by oversight by people outside corporations. But, undersight by employees inside corporations is a different thing altogether, especially when many of those employees hold shares of their employers' stock and have a direct financial stake in the matter.

If investors believe in the basic honesty of millions of American workers who now enjoy legal protections they never had before, and believe that employees will engage in undersight by reporting suspected fraud against shareholders, then the combined oversight and undersight provisions of Sarbanes-Oxley may provide a solid foundation for increased investor confidence.

Guest writer Daniel P. Westman is a partner in the law firm Shaw Pittman LLP. He litigates whistleblower cases on behalf of management, counsels management about policies concerning whistleblowing, and is the author of Whistleblowing: The Law of Retaliatory Discharge (BNA Books 1991).