Does your company have a whistleblower hotline in place? It should. Hotline reports from employees provide an opportunity for your company to address issues in a proactive manner, and avoid or lessen financial liability and legal or reputational damage to your company.

Congress passed the Sarbanes-Oxley Act (SOX) in 2002, requiring public companies to put in place a whistleblower hotline to report fraud and illegal activity. Those who retaliate against whistleblowers are subject to criminal penalties. Dodd-Frank legislation, passed by Congress in 2010, states that under certain circumstances, rewards be paid to whistleblowers who report securities violations and other illegal activities.

Hotlines were in use at some companies prior to SOX legislation, but they were not common. This legislation was passed in the wake of the 2001 accounting scandals at Enron, Tyco, WorldCom and Adelphia Communications, resulting in criminal charges brought against the CEOs of those companies and the unprecedented dissolution of one of the “Big Five” accounting firms, Arthur Anderson, auditors of Enron. Many private companies as well as nonprofits now have a hotline in place.

In practice, employees use hotlines for anything they are uncomfortable reporting using normal company channels, mostly for fear of retaliation. In addition to fraud or illegal activities, these reports could run the gamut from perceived violation of employee anti-discrimination laws, to violation of company travel and entertainment policies, to a tyrant in a management position making life miserable for direct reports.

The audit committee of the company’s board often has the responsibility for reviewing hotline reports and the results of the subsequent investigation. The hotline is monitored by the organization’s internal auditor, legal counsel, or in some cases, an outside firm. Whoever is monitoring the hotline informs the chair of the audit committee and the CEO, as long as the CEO is not the subject of the hotline report. In the event that the hotline report involves the CEO, the monitor directly informs the chair of the audit committee.

I have been a member of many board audit committees and chairman of one. The CEOs of these organizations embrace the hotline as a valuable resource to uncover wrong-doing in their companies, and as a way for corrective action to take place before an issue escalates out of control. Boards view hotlines as a way to ensure they are made aware of issues that require attention.

When SOX was passed by Congress, there was much skepticism as to its utility in the many areas that the legislation addressed, including the whistleblower hotline provisions. As the CEO of PQ Corporation at the time, I had a different view. Having once worked for a tyrant in my earlier years at the company with no practical way to report how this individual was micromanaging and adversely impacting the decision-making ability of the profit center’s employees, I embraced the hotline legislation. No one would take the risk of being personally identified with a complaint about this individual. No one trusted the HR department or the CEO to take action. Had we had the hotline at the time, our concerns would have gone to the audit committee of the board, which after a proper investigation, might have forced the CEO to take action.

Bad managers drive out good employees. I nearly left the company due to this tyrant. Had I left, the company would have been deprived of its future CEO. That is how important a hotline is for employees – a way to report these types of managers and feel safe doing so.

Due to this experience, as an audit committee member, when a tyrant is reported through the company’s hotline, I always take a personal interest in how the complaint is investigated by executive management and the actions to be taken.

Are many hotline reports found to have little substance, or are malicious in some manner? Yes. All hotline reports, however, need to be investigated. That is part of the process. A rough measure of the climate within an organization and a company’s relationship with employees is reflected in the types and substance of the hotline reports that are submitted.

Have there been instances in which whistleblowers using their company’s hotline were retaliated against for reporting fraud or other illegal actions? Yes. Often these situations become public, damaging the company’s reputation. The company runs the risk of being assessed huge monetary damages for retaliating against the employee. It takes courage for an employee to submit a hotline report knowing that retaliation may still occur despite the potential company penalty.

In an Oct. 25, 2014 article in the Harvard Law School Forum on Corporate Governance and Financial Regulation, Kobi Kastiel writes, “SEC Chair Mary Jo White recently commented that it is up to company directors, along with senior management under the purview of the board, to set the ‘all-important “tone at the top” for the entire company.’” Recognition by employees throughout the organization that hotline reports are taken seriously, are visible to members of the board and are effectively investigated and resolved sends a very strong message about the high standards to which all employees will be held regarding ethics and obeying the law.

Employees pick up on everything, including the tone set by the organization’s leadership. CEOs, set the right values, standards of ethical behavior and the right tone within your company. Ensure all employees are informed about the existence of the hotline, and ensure that those submitting hotline reports learn of the results of the investigation. You will significantly reduce the possibility of a scandal and damage to the reputation of your organization.