Whistleblower Protections and Incentives for Auditors and Accountants
IMGCAP(1)][IMGCAP(2)]Two years ago, the Supreme Court held in Lawson v. FMR that employees of contractors of public companies, including employees of accounting and audit firms, are protected under the whistleblower protection provision of the Sarbanes-Oxley Act.
Lawson recognizes the critical roles that auditors and accountants play in exposing fraud, and the importance of affording these critical gatekeepers robust whistleblower protection.
In addition to being protected against retaliation, auditors and accountants have a financial incentive to report fraud to the SEC. In certain circumstances, auditors and accountants may be eligible for a whistleblower bounty under the SEC’s whistleblower reward program. This article summarizes the rewards and protections for auditors and accountants who disclose fraud or other violations of federal securities laws.
Reasons to Protect Auditors and Accountants from Retaliation
The majority opinion in Lawson closely examines the legislative history of Sarbanes-Oxley’s whistleblower protection provision and discusses why it is essential to protect accountants and auditors from retaliation:
“Also clear from the legislative record is Congress’ understanding that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron’s contractors. Congressional investigators discovered ample evidence of contractors demoting or discharging employees they have engaged who jeopardized the contractor’s business relationship with Enron by objecting to Enron’s financial practices. . . . . Emphasizing the importance of outside professionals as ‘gatekeepers who detect and deter fraud,’ the Senate Report concludes: ‘Congress must reconsider the incentive system that has been set up that encourages accountants and lawyers who come across fraud in their work to remain silent.’ Id., at 20–21. From this legislative history, one can safely conclude that Congress enacted §1514A aiming to encourage whistleblowing by contractor employees who suspect fraud involving the public companies with whom they work.”
SOX Whistleblower Protection for Auditors and Accountants
In the audit room, it is rarely popular to bring up new issues. Auditors already work excruciatingly long hours with tight deadlines, and finding problems only creates more work. While there is a prevalent perception that auditors are combing corporate financial statements in the hopes of uncovering fraud, in reality identifying fraud during a year-end audit creates several challenges. From the partners all the way down to the associates, an audit becomes exponentially more difficult and time consuming when a client has problems with its controls or financial statements.
Furthermore, the partners often prefer not to annoy their clients. Indeed, the “independent and objective” partners have a substantial interest in maintaining positive client relations. Audit firms receive sizable fees to ensure that the client’s financial statements are materially correct and there is fierce competition to retain existing clients and attract new clients. However, when an audit firm actually does its job, it may suffer as a result. In February 2016, Ceres fired the audit firm KPMG for issuing a going concern opinion.
In short, it can be very difficult for auditors to raise legitimate concerns. However, when potentially illegal or unethical activities issues are being swept under the rug, auditors should avoid the typical “pleaser” attitude and speak up. Fortunately for auditors who want to do this right thing, whistleblower laws are in place to provide them with protections against retaliation.
SOX provides robust protection against a broad range of retaliatory adverse employing actions, including discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against a whistleblower. If a SOX whistleblower prevails on a retaliation claim, he or she may receive lost wages and benefits, reinstatement, and special damages, which include emotional distress, impairment of reputation, personal humiliation, and other non-economic harm resulting from retaliation. Recently, a jury awarded $6 million dollars to a whistleblower in a Sarbanes-Oxley retaliation case.
To prevail under SOX’s whistleblower provision, a whistleblower must prove by a preponderance of the evidence that (1) she engaged in protected activity (see below); (2) the employer knew that she engaged in protected activity; (3) she suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable personnel action. A contributing factor is any factor which, alone or in connection with other factors, tends to affect in any way the outcome of the decision. Causation can be inferred from timing alone where an adverse employment action follows on the heels of protected activity.
In order to demonstrate that a whistleblower engaged in “protected activity”, a whistleblower must show that he or she reasonably believed the conduct complained of constituted a violation of mail fraud, wire fraud, bank fraud, securities or commodities fraud, any SEC rule or regulation, or any provision of federal law relating to fraud against shareholders.
A whistleblower need not show that an actual violation occurred so long as he or she reasonably believed that the violation was likely to happen. As such, an auditor may still bring a successful SOX retaliation claim when the audit firm issues an unqualified opinion. The focus is on the whistleblower’s reasonable belief.
The Dodd-Frank Act also offers whistleblowers protection against retaliation, including a broader scope of protected whistleblowing and the opportunity to recover double lost wages. To learn more about the differences between the Sarbanes-Oxley and Dodd-Frank whistleblower protection provisions, click here.
Monetary Awards for Whistleblowers
The SEC’s Whistleblower Program provides rewards to whistleblowers who report violations of the federal securities laws to the SEC. A whistleblower can obtain an award of between 10 and 30 percent of the monetary sanctions collected in actions brought by the SEC (or related actions brought by other regulatory and law enforcement authorities) stemming from original information provided by the whistleblower.
An auditor (or any internal or external accountant) may disclose information to the SEC and be eligible for an award if:
• the auditor has a reasonable basis to believe that disclosure of the information to the SEC is necessary to prevent the engagement client from engaging in conduct likely to cause substantial injury to the financial interest of the entity or investors;
• the individual has a reasonable basis to believe that the relevant entity is engaging in conduct to obstruct an internal or SEC investigation; or
• at least 120 days have elapsed since the auditor (a) provided the information to the relevant entity’s audit committee, chief legal officer, chief compliance officer (or their equivalents), or supervisor, or (b) received the information, if the auditor received it under circumstances indicating that the entity’s audit committee, chief legal officer, chief compliance officer or supervisor was already aware of the information.
The reason for the 120-day internal notification requirement is to give companies an opportunity to address the issues raised by whistleblowers internally. If a company fails to take remedial action to correct a potential violation (and no otherwise eligible individual has blown the whistle first), an auditor can report the information to the SEC and become eligible for an award.
In a recent press release announcing a whistleblower award, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, recognizes the critical role of auditors in combatting fraud: “Individuals who perform internal audit, compliance, and legal functions for companies are on the front lines in the battle against fraud and corruption. They often are privy to the very kinds of specific, timely, and credible information that can prevent an imminent fraud or stop an ongoing one. These individuals may be eligible for an SEC whistleblower award if their companies fail to take appropriate, timely action on information they first reported internally.”
Recognizing the risk of retaliation, the SEC Whistleblower Program permits whistleblowers to submit information anonymously by having an attorney provide the information to the SEC on behalf of the whistleblower.
The SEC continues to prioritize financial reporting and disclosure cases, and auditors are well positioned to detect these violations. While whistleblowing is never easy, auditors and accountants can rest assured that there are robust protections against retaliation. And with the incentives provided by Dodd-Frank, accountants and auditors can partner with the SEC to protect investors and combat fraud.
Jason Zuckerman is a principal at the law firm Zuckerman Law in Washington, D.C., where he litigates whistleblower retaliation, qui tam, wrongful discharge, discrimination, non-compete, and other employment-related claims, and authors the Whistleblower Protection Law Blog. Matthew Stock is a CPA and former KPMG auditor who also works at Zuckerman Law. He has audited a broad range of industries, both domestically and internationally, including large public companies and financial institutions.