Accountants -- in-house, and internal andexternal auditors alike -- often stand at the crossroads of corporate misconduct and play an important investor protection role. In fact, CPAs' primary duty is to protect the public and act as independent watchdogs over publicly traded corporations.
However, after years of corporate scandals, it is apparent that the securities enforcement status quo has been inadequate. Historically, when CPAs discovered attempted or actual fraud, client confidentiality rules limited their ability to publicly report their observations. With the advent of Dodd-Frank, accountants no longer need to choose between doing the right thing and risking the loss of their professional licenses.
Arguably the most sweeping financial reform effort since the Great Depression, Dodd-Frank required the Securities and Exchange Commission to establish a whistleblower program offering significant employment protections and monetary awards to individuals, including accountants, who report possible violations of the federal securities laws. This program demonstrates the federal government's commitment to valuing and encouraging citizen cooperation in rooting out fraud.
Because of their access and knowledge, accountants are in an ideal position to provide their clients and the SEC with early and invaluable assistance in identifying the scope, participants, victims and ill-gotten gains associated with corporate wrongdoing. With their help, more violations will be detected and violators will be stopped earlier.
RESPONSIBILITIES
The Public Company Accounting Oversight Board regulates external auditors of publicly traded companies, and establishes the related professional standards. For all other engagements, there exists a patchwork of regulation, including states' rules and standards, the American Institute of CPAs' Code of Professional Conduct, and Generally Accepted Auditing Standards. The overarching principle of these guidelines is that auditors are required to act with integrity and fulfill their responsibilities to the public.
Specifically, under the Sarbanes-Oxley Act and other guidelines, auditors are required to report significant securities violations to the client's audit committee or full board of directors. If the client refuses to properly account for or disclose the fraud, auditors should issue a qualified or adverse opinion, and then withdraw from the engagement if the client refuses to accept the opinion.
YOUR RIGHTS TO WHISTLEBLOW
With few exclusions or qualifications, any individual or group of individuals, regardless of citizenship, can report a possible securities violation that has occurred, is ongoing, or is about to occur. Accountants are specifically authorized to participate and anyone may report violations anonymously if represented by counsel.
Under Dodd-Frank, employers and accounting firms may not retaliate against accountants who, in good faith and according to the program's rules, provide information to the SEC. In the event of retaliation, there are significant remedies, including re-instatement with equivalent seniority, two times back pay with interest, attorney fees, and other related expenses. Dodd-Frank also requires the SEC to pay monetary awards -- between 10 and 30 percent of the total monetary sanctions collected -- to eligible accountant whistleblowers who voluntarily provide original information leading to an enforcement action in which the agency obtains at least $1 million in sanctions.
An accountant whistleblower may receive a monetary award if:
The violation was discovered through an audit of a company's financial statements and there is a reasonable basis to believe that: The disclosure is necessary to prevent substantial injury to the entity or investors; the entity's conduct will impede an investigation of the misconduct; or the submission would not otherwise be contrary to the requirements of Section 10A of the Exchange Act. In assessing whether a submission is contrary to the requirements of Section 10A, the SEC may consider: whether the audit firm conducted an inquiry into the possible violation and the quality of that inquiry; the response to the allegation and whether the audit firm followed the requirements of Section 10A; the position and role the individual played in the audit firm's violation; the role of the whistleblower in the inquiry; and the timing of the whistleblower's submission.
The violation was discovered during an engagement required by securities laws but other than an audit of a public company's financial statements, or by an employee whose duties involve compliance or internal audits for an organization, and the accountant has a reasonable basis to believe that: the disclosure is necessary to prevent substantial injury to the entity or investors; the entity's conduct will impede an investigation of the misconduct; or the accountant reported the information to the entity's audit committee, chief legal or compliance officer, or their supervisor, and more than 120 days has elapsed.
The violation was discovered while representing, in a non-audit capacity, an auditing client of the accountant's firm.
The violation involves potential wrongdoing by an auditing firm, including failing to comply with the requirements of Section 10A. If a specific and credible allegation against the firm is made and results in a successful SEC enforcement action against the engagement client, its officers or employees, then the whistleblower can also obtain a monetary award for that action as well.
CONFIDENTIALITY CONCERNS
CPAs may fear that reporting will violate client confidentiality rules and put their state-issued license at risk. The AICPA Code of Professional Conduct, as well as most state codes, prohibit the disclosure of any confidential client information without the client's specific consent. However, these codes generally do not "prohibit a member's compliance with applicable laws and government regulations." Therefore, an accountant who reports possible securities violations consistent with Dodd-Frank and the program's rules would be acting in compliance with applicable laws and regulations.
Even if this were not true, Dodd-Frank and the SEC's implementing rules would almost certainly protect accountant whistleblowers. Pursuant to the Supremacy Clause, federal laws, including regulations enacted by a federal agency, pre-empt conflicting state law if their enactment was a valid act of Congress or exercise of congressionally delegated authority, and the pre-emption of state law was intended -- as is the case here.
Accordingly, under these circumstances, an accountant may disclose confidential information to the SEC without fear of an adverse state disciplinary action.
CONCLUSION
Dodd-Frank empowers accountants to make ethical choices about reporting possible securities violations. But before whistleblowing, accountants should consider the following:
In most cases, you should report possible securities violations to your employer or client in accordance with relevant rules and regulations. However, your duties to the public should not be sacrificed in order to comply with non-binding professional conduct standards.
Although the rules for the whistleblower program only require a whistleblower to have a reasonable belief that a possible securities violation has occurred, is ongoing, or is about to occur, you should attempt to confirm the existence of a violation before reporting to the SEC.
Before reporting possible violations to the SEC, you should consult independent counsel regarding the risks and requirements.
If you fear retaliation by an employer or client, consider reporting possible securities violations anonymously to the SEC with the assistance of counsel.
As contrary as whistleblowing may seem to the development of a trusting auditor/client relationship, Dodd-Frank provides the incentives and protectinecessary for auditors to fulfill their role as public watchdogs. By placing the public first, CPAs' integrity is established and everyone benefits from the resulting lower risk and greater trust in the market.
Eileen Z. Taylor, Ph.D., CPA, is an assistant professor of accounting at North Carolina State University, and currently teaches accounting information systems and fraud examination. Jordan A. Thomas is a partner at Labaton Sucharow LLP and chairs its whistleblower representation practice. He is also the editor of
