Washington, D.C. - Audit firms that engage in shady accounting practices or financial fraud face a growing risk of being turned in - by their own staff accountants and by the internal auditors of their public company clients.

With financial reporting chicanery on the rise due to the shaky economy, enforcement officials at the Public Company Accounting Oversight Board are finding accountants and other "insiders" increasingly willing to blow the whistle on public accounting firms that cut auditing corners, violate accounting standards, or help to cook corporate books.

Last year the board fielded 179 tips and complaints alleging wrongdoing by audit firms, their employees and others - a record number, according to PCAOB Enforcement and Investigations Division director Claudius Modesti, who noted that the number of such allegations has been increasing steadily for the past few years.

Many, though not all, of those tips are coming from accountants employed by the CPA firms that are the subjects of the complaints. According to Modesti, his enforcement staff also receives complaints of auditor wrongdoing from internal accountants at corporations, outside consultants and individual investors.

The flow of accusations is channeled through the PCAOB's online "Tip Center" - a reporting resource on the board's Web site where accountants and others with knowledge of audit firm missteps are invited to inform enforcement officials of the situation. Modesti, who established the online complaint process shortly after joining the PCAOB in 2004, said the Tip Center "was one of the first things I wanted to have up and running" to assist the board's enforcement efforts.

"We thought auditors and investors would like to have an avenue to report violations of accounting and auditing standards and financial fraud," he told Accounting Today.

The online Tip Center, which can be accessed directly from the home page of the board's Web site, http://pcaobus.org, urges accountants and others with information about auditor wrongdoing to "report suspicious or criminal activity of registered public accounting firms or people associated with them."

Officials at the Enforcement Division promise to review any leads provided to the Tip Center promptly, noting, "Tips and other information from the public are important sources for the PCAOB."

In addition to being asked to submit details of "potential violations of law or PCAOB rules," informants are invited to "provide information that may be relevant to a PCAOB inspection," as well as any other information that may be relevant to the board's oversight responsibilities.

A RANGE OF COMPLAINTS

According to Modesti, the tips received by the PCAOB run the gamut, from allegations of GAAP violations, to independence issues, suspected non-compliance with PCAOB audit standards, revenue recognition irregularities, and even billing disputes involving audit firms.

The Tip Center specifically asks informants for information about problems relating to auditor independence, document destruction, accounting fraud, quality control concerns and auditor ethics.

Tipsters raising concerns about the practices of public companies are urged to report activities such as related-party transactions, internal control weaknesses, initial public offering issues, and questionable activities involving issuers and subsidiaries.

After evaluating the allegations submitted to the Tip Center, the board's enforcement staff "may use the information in any disciplinary order or other adjudicatory proceeding." The PCAOB also reserves the right to provide Tip Center information to other state or federal regulatory or law enforcement agencies, or foreign authorities.

"We often share the information we receive though the Tip Center with other regulators, including those at the SEC," Modesti explained. "Even if a particular piece of information is not relevant to us, it may be of interest to others."

Because the Sarbanes-Oxley Act prohibits the PCAOB and its staff from disclosing information about the board's non-public investigative and enforcement activities, officials cannot disclose how many reports received by the Tip Center have resulted in charges against audit firms.

Over the past few years, however, PCAOB enforcement proceedings against more than two dozen accounting firms have been settled publicly, and a number of the resulting disciplinary orders can be traced back to information furnished to the Tip Center.

Even if a submission to the Tip Center does not result in any enforcement action by the board, the information supplied may help the PCAOB develop new rules or auditing standards, Modesti said.

ANONYMITY ASSURED

While accountants and others who report audit firm wrongdoing to the PCAOB's Tip Center are urged to provide contact information "so that we may ask any important follow-up questions in response to your tip," the Enforcement Division does accept anonymous submissions.

"Currently, about 15 percent of the tips we receive are anonymous," Modesti said. Tipsters who decline to identify themselves are asked to contact the enforcement staff again within 24 hours so officials can verify the information they have provided.

Accountants and other audit firm personnel who report their employers to the PCAOB for fraud or other criminal activity can request that the board withhold their identities. But while "our rules allow us to limit disclosure of our confidential sources," Modesti acknowledged that PCAOB enforcers have no specific authority to protect whistleblowers from retaliation or to penalize accounting firms that take revenge against tipsters.

Under Sarbanes-Oxley, however, the U.S. Occupational Safety & Health Administration is explicitly empowered to provide protection to financial fraud whistleblowers, and the PCAOB's tip Web site notes that informants who are retaliated against for disclosing wrongdoing can file a complaint with OSHA within 90 days of an adverse action.

In addition to contacting the Tip Center online, accountants and others wishing to report wrongdoing by audit firms and their public company clients can provide information to the board's enforcement staff by phone at (800) 741-3158, by fax at (202) 862-0757, or by mail to PCAOB Tip Center, 1666 K St., NW, Washington, D.C. 20008.

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