Should CPAs Be Financially Rewarded As Whistleblowers?
The SEC recently implemented a whistleblower program that would financially reward a CPA. Possible problems this controversial program may raise for the public accounting industry and their clients revealed.
July 11, 2011
In the wake of several widely-publicized Ponzi schemes, including Bernie Madoff’s, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (Dodd-Frank). One of the goals of Dodd-Frank was to extend whistleblower protection beyond the Sarbanes-Oxley Act of 2002 to further incentivize whistleblowers 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 whistleblowers who 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. This raises a number of ethical and practical considerations for CPAs and their clients.
Overview of the Whistleblower Program
To be eligible for a reward under the whistleblower provisions, a whistleblower must:
voluntarily provide the U.S. Securities and Exchange Commission (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 whistleblower 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 whistleblower receives nothing.
To receive the award, the whistleblower must agree to provide sworn testimony if needed and other assistance and cooperation with the SEC’s investigation. As a result, whistleblowers may be faced with years of ongoing cooperative obligations before receiving any payment. Although initial whistleblower reports can be made anonymously via an attorney, a whistleblower must identify himself or herself to the SEC before collecting any reward.
Although the reward to a whistleblower may be increased if the whistleblower has first reported the suspected violation internally, the provisions do not require whistleblowers to report internally before coming to the SEC. There is, therefore, likely to be a significant increase in external whistleblower activity. The whistleblower provisions apply retroactively to information provided to the SEC on or after July 21, 2010, the date that Dodd-Frank was enacted.
Eligibility of Accountants to Receive Whistleblower Awards
The whistleblower provisions exclude two categories of accountants from award eligibility because of their pre-existing legal duty to report securities violations:
Other categories of individuals that are ineligible to receive whistleblower awards include:
Notably, the whistleblower 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.
Is the Accountant Exclusion Too Narrow?
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 whistleblower 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:
Despite the concerns expressed by the public accounting community, the current whistleblower provisions that the SEC is implementing do allow a CPA who reports potential securities law violations with respect to his or her own firm’s performance of an audit to be eligible for a financial reward. Although it is too soon to know the impact this provision will have on the accounting industry, CPAs should be prepared to address concerns their clients may have about the whistleblower provisions and their impact on the duties their external auditors owe them.
View a complete copy of the whistleblower provisions here (PDF). You can also view the AICPA’s comments stand on whistleblowers here and the SEC’s press release relating to the whistleblower provisions here.
Jason M. Rosenthal, Esq., is the managing partner of Schopf & Weiss LLP, a national business litigation firm based in Chicago. Lesley G. Smith, a partner at Schopf, represents clients in complex securities matters, including handling corporate investigations relating to alleged violations of securities laws.