Accountant Forums

Thread Tools

Accountants' Obligations for Whistleblowing

Junior Member
Join Date: Aug 2011
Location: San Luis Obispo, CA
Posts: 1
Thanked: 0
      08-10-2011, 02:48 PM
Accountants as Whistle-Blowers: Confidentiality Issues

Accountants are increasingly being asked to blow the whistle on corporate wrongdoing to help stem the tide of recent massive financial frauds such as Bernie Madoff’s Ponzi scheme. I have blogged about whistle-blowing considerations before, but not on specific expectations in the law for accountants to blow the whistle. The laws that encourage whistle-blowing by accountants may be well-meaning but they fail to consider the fact that professional accountants and auditors who are Certified Public Accountants or who hold a Certificate in Management Accounting and Certificate in Internal Auditing, all have to abide by a strict code of conduct that generally precludes whistle-blowing.

Corporate accountants might be seen as disloyal if they blew the whistle on wrongdoing by their employer. However, this is where ethics and the law part ways. Ethical people use the law as a minimum standard of behavior. They always try to adhere to the law and, in this case, rules of professional accounting and auditing. Under the profession’s rules of conduct, if you know your employer is committing fraud the first step is to take your concerns up the chain of command all the way to the audit committee of the board of directors, if necessary. If you are shut out at every step then, based on your conscience and ethical beliefs about right and wrong, it may be that you choose to take your concerns outside the organization even though it violates your confidentiality obligation and the rules of professional conduct. This is whistle-blowing.

Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. One of the goals of Dodd-Frank was to extend whistle-blower protection beyond the Sarbanes-Oxley Act of 2002 to further incentivize whistle-blowers to expose securities fraud. On May 25, 2011, the U.S. Securities and Exchange Commission (SEC) approved final rules to implement a program to pay individual whistle-blowers that provide information relating to possible securities law violations that lead to successful SEC enforcement actions.

While CPAs are not permitted to receive a reward under Dodd-Frank by reporting possible violations of a client, they are permitted to receive a reward by reporting possible violations of their accounting firms in the performance of audit services for a client. In a sense Dodd-Frank contains what some have called a “bounty hunter” provision. To be eligible for a reward under the whistle-blower provisions, a whistle-blower must voluntarily provide the SEC with original information that leads to a successful enforcement action by the SEC and that results in monetary sanctions of more than $1 million. Where the SEC recovers at least $1 million, the whistle-blower must be awarded anywhere from 10 percent to 30 percent of amounts recovered, although the SEC has broad discretion in determining the exact amount of the award. If the SEC does not ultimately recover at least $1 million, the whistle-blower receives nothing.

To receive the award, the whistle-blower must agree to provide sworn testimony if needed and other assistance and cooperation with the SEC’s investigation. As a result, whistle-blowers may be faced with years of ongoing cooperative obligations before receiving any payment. Although initial whistle-blower reports can be made anonymously via an attorney, a whistle-blower must identify himself or herself to the SEC before collecting any reward.

The whistle-blower provisions exclude two categories of accountants from award eligibility because of their preexisting legal duty to report securities violations:
1. Individuals with internal compliance or audit responsibilities at an entity, including CPAs, who receive information about potential violations, cannot receive whistle-blower awards since it is part of their job responsibilities to report suspicion of illegal acts to management. However, these individuals will not be excluded from receiving a whistle-blower award where:
1. Disclosure to the SEC is needed to prevent “substantial injury” to the financial interest of an entity or its investors,
2. The whistle-blower reasonably believes the entity is impeding investigation of the misconduct or
3. The whistle-blower has first reported the violation internally and at least 120 days have passed.
2. CPAs who receive information about potential violations of a client or its directors or officers through an audit or other engagement required under the federal securities laws are not eligible to receive whistle-blower awards. The SEC included this exclusion so as not to undermine the legal duty that auditors have under Section 10A of the Securities and Exchange Act of 1934 to report illegal acts by officers, directors, and other client personnel up the chain of command. If the issues are not addressed adequately by management, the auditor must then resign from the engagement and file a report with the SEC.

Notably, the whistle-blower exclusions do not apply to CPAs who report information about potential violations regarding their own firms’ performance of audit services for a client. This is true even where the CPA’s information about his or her firm leads to a successful enforcement action against one of the firm’s clients.
Several members of the public accounting industry, including KPMG, Ernst & Young, PricewaterhouseCoopers and the Center for Audit Quality, have expressed concerns to the SEC that the accountant exclusion in the whistle-blower provisions is too narrow. Those entities believe that permitting CPAs to obtain monetary rewards by blowing the whistle on their own firms’ performance of services for clients could create several significant problems with respect to maintaining the confidentiality of client information.
Reply With Quote

Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are On
Refbacks are Off

Similar Threads
Thread Thread Starter Forum Replies Last Post
Personal accounts used for business Tybow759 Quickbooks 2 08-26-2013 03:22 PM
Suggestion for Improvement Ken Blake Quicken 19 04-06-2013 06:42 PM
Bank charges included as payment for tax JennJenn General Accountancy Discussion 2 04-06-2013 04:01 PM
local or big companies for retirement and TOD Financial Planning 0 04-05-2013 10:12 PM
Calif State 2004 TurboTax Bug - Missing a State Adjustment for Earnings from US Govt. Obligations! Don Enderton Tax 9 02-15-2005 08:06 AM

All times are GMT. The time now is 12:55 PM.
Posts in this forum do not constitute the advice of or its members. Financial advice should always be taken from qualified advisors before committing to a financial decision.