Tracy Coenen
Tracy Coenen

Whistleblower Case Study: Independent Internal Investigations

What you should do before the government comes knocking.

February 2, 2012
by Tracy Coenen, CPA, CFF

When a whistleblower goes to a government agency to report allegations of fraud and corruption within a company, no one knows whether the government will act. The more detailed and credible the allegations, the more likely the government will ask questions. The company may even become subject to a full-blown government investigation. Because of the uncertainty, companies must take whistleblower allegations seriously and take appropriate steps to investigate internally. Companies can’t afford to sit around and hope the whistleblower report goes nowhere, because inaction could lead to harsher penalties. The public company highlighted in the case study below did an outstanding job of handling a former employee’s allegations, so when the government came knocking, the company was in an excellent position.

Initial Allegations

Management is often concerned about the possibility that a whistleblower may make false reports to government agencies. While that is a legitimate concern, the more pressing issue is the possibility that a whistleblower makes an accurate report of fraud to the government.
False allegations require some time, expense and effort to debunk, but ultimately the innocent company is in a good position. True allegations of fraud, misappropriation and other bad acts are going to cost a company far more. So quickly dealing with any allegation immediately becomes more important.

Companies should have policies and procedures in place to guide the evaluation of whistleblower allegations, with increasing effort dedicated to the claims as the seriousness and credibility of the claims increase. In other words, allegations with no apparent credibility will likely be handled internally and quickly closed. On the other end of the spectrum, allegations that are initially evaluated as serious and credible will require quick escalation to a full investigation.

Reports of Fraud

The company in this case study took an efficient and effective approach to whistleblower allegations. A supervisory employee in the company’s accounting department was having performance problems. She was warned that she was in danger of losing her job. She responded with a whistleblower letter to the U.S. Securities and Exchange Commission (SEC), the board of directors and independent auditors. She stated that she was quitting her job because of serious accounting fraud within the company.

Upper management immediately evaluated the allegations and determined that they were without merit. The situation was a little tricky, however. Most of the allegations were related to issues that the company had already identified, disclosed and remediated.  While there was nothing new or credible in the letter, management knew that the SEC was likely to take the allegations seriously based on the details contained in the letter.

The board of directors determined that an independent investigation of the allegations should be done. They wanted an unbiased analysis, and they retained outside counsel and a forensic accountant to investigate. Management gathered documents relevant to the allegations, and they gave the investigator access to all employees and accounting records.

Investigation Results

The investigator found that there was no merit to any of the allegations of the whistleblower. While she identified some legitimate financial reporting issues within the company, they were previously disclosed in SEC filings, and remediation efforts were well underway. One by one, the issues that the whistleblower raised were refuted, and there was nothing to indicate that the company was engaged in accounting fraud.

Less than a week after a report on the independent investigation was submitted to counsel, the SEC made contact with the company and began an informal investigation into the issues. The company’s quick action and full investigation of the allegations gave them immediate credibility with the government investigators.

Doing It Right

The company in our case study did several things right, even before the whistleblower came forward with her allegations. Other companies can learn from these steps that put the company in an excellent position from the start of the government inquiry:

  • Management identified the company’s financial reporting problems long before the whistleblower came along, and had already made substantial steps toward correcting the problems.
  • Issues that were raised in the course of business were investigated and changes were made based on the findings.
  • Outside lawyers and consultants were retained to provide opinions and valuations to ensure that financial statements and disclosures were accurate.
  • Substantial changes were made in the accounting department to ensure that transactions would be recorded correctly going forward.
  • Documentation on the corrective actions was maintained to demonstrate that management was thoroughly examining issues and following authoritative guidance.
  • The forensic accountant was given unlimited access to people and documents in order to properly complete an independent investigation.
  • Management and the board of directors did not attempt to sway or influence the investigation or final report.

Most importantly, management and the board of directors took swift action as soon as the allegations were made by the purported whistleblower. By beginning immediately, the company was able to complete an independent investigation before the government got involved, lending more credibility to the findings. If the investigation and the findings had been delayed until after the SEC became officially involved, the government may have viewed the results skeptically.

Evaluating the whistleblower allegations has been costly for the company. Not only did the company incur the cost of the independent investigation, management will still have to commit time and money to complying with requests from the SEC. However, there are costs and hazards with being publicly traded and being subject to many regulations.


This case demonstrates how important it is to take whistleblower allegations seriously, even if management has knowledge that the allegations are false. Management knew the government might consider the whistleblower letter credible because of the details provided and the manner of presentation. They quickly engaged an independent forensic accountant to evaluate the allegations and report the findings to counsel and the board of directors. This case was handled properly, and as a result, the company is in an excellent position regarding the SEC’s inquiry.

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Tracy L. Coenen, CPA, CFF, is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted many investigations involving financial statement fraud, securities fraud, investment fraud, etc. Coenen is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud can be reached at 312-498-3661.