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Whistleblowing Laws Evolve

By Patrice Schiano, CPA, CFF, and Arcady Zaydenverg, CPA, CFE
November 1, 2021

History has taught us the importance of whistleblowers, and increased protections will ensure that they can report crime and misconduct with confidence.

 

Whistleblower protections have come a long way since 2001 when Sherron Watkins, a former Arthur Andersen auditor, first blew the whistle on Enron in one of the largest corporate financial frauds in U.S. history. On the 20th anniversary of Enron’s collapse, it’s worth examining the hard-won protections available to today’s whistleblowers.

 

Given their understanding of a company’s books and records as well as internal controls, accountants are well-situated to blow the whistle. So what should an accountant do if they find fraud or securities law violations?

 

Whistleblowers are encouraged to report wrongdoing internally or through a company’s whistleblower hotline, if one exists. In situations where the corporate culture encourages such behavior, management will likely implement corrective action or report the matter to the appropriate authorities, if warranted.

 

But what if, like at Enron, the corporate culture or the tone at the top is suspect? Watkins tried to report accounting irregularities to Kenneth Lay, Enron’s CEO, but her claims fell on deaf ears. At that point, Watkins’s identity was well-known within the organization and the business community. Like many whistleblowers whose identities aren’t protected, life for Watkins became increasingly difficult.

 

Prior to Enron, many whistleblowers were retaliated against. They lost their careers and reputations. Many were blackballed and never able to find gainful employment in their respective professions again.

 

ENTER SARBANES-OXLEY

 

In the wake of Enron, Congress passed the Sarbanes-Oxley Act of 2002 (SOX). Most accountants are likely familiar with this legislation, especially because of all the requirements imposed on auditors, management, and boards of directors to ensure the accuracy of financial information. One of the lesser-known SOX provisions is Section 806—Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud. It prohibited the efforts of any “officer, employee, contractor, subcontractor, or agent” of a publicly traded company to “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee” who blows the whistle on securities law violations including fraud against shareholders.

 

This provision was a step in the right direction but didn’t go far enough to prevent retaliation. The easiest way to prevent retaliation is to keep the identity of a whistleblower confidential, which may not be possible if the information the whistleblower provides is so unique as to give away their identity.

 

It wasn’t until the Great Recession that Congress again acted to strengthen whistleblower rights. Under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, whistleblowers could now remain anonymous, have their retaliation claims heard in federal court, and possibly earn a whistleblower award.

 

WHERE TO START

 

So what do whistleblowers need to do to file a successful complaint with the U.S. Securities & Exchange Commission (SEC)? Whether filing a complaint with the SEC or with another agency, retaining an attorney who is experienced in whistleblower laws is critical. Besides advising the whistleblower of their rights and helping them navigate through complicated legal and procedural requirements, filing claims through an attorney can help whistleblowers remain anonymous.

 

In fact, if a whistleblower wants to remain anonymous, the SEC mandates that the whistleblower retain an attorney to file the claim. Filing complaints anonymously can help whistleblowers keep their jobs and their professional reputations intact while the SEC or other agency considers an enforcement action. If the SEC doesn’t bring an action, the whistleblower can continue working without fear of retaliation because their identity hasn’t been disclosed.

 

Under Section 21F of the Securities Exchange Act of 1934, “eligible whistleblowers who voluntarily provide the Commission with original information about a violation of the federal securities laws that leads to the successful enforcement” of a covered action are entitled to an award of 10% to 30% of what has been collected in monetary sanctions. To be eligible for the award, such monetary sanctions must exceed $1 million. The award is discretionary, and among the factors considered are whether the reporting was voluntary and original.

 

To be voluntary, the submission to the SEC must precede any request for information from the SEC. Submissions aren’t considered voluntary if the whistleblower has a preexisting legal duty to disclose the information.

 

For information to be considered original, there are four requirements:

 

  1. The information must be derived by independent knowledge or analysis;
  2. It must not be previously known to the SEC from any other source;
  3. It isn’t derived from a previous allegation unless the whistleblower is the original source of the information; and
  4. The information was provided to the SEC after July 21, 2010, the date that the Dodd-Frank Act was enacted.

 

Whistleblowers should be aware that it can still take years to collect an award.

 

Each year the SEC’s Office of the Whistleblower (OWB) submits a report to Congress. According to the SEC, fiscal 2020 was a record-breaking year for the whistleblower program. The SEC received and processed the largest number of whistleblower claims and set a record for the most awards paid in terms of the number of individuals and dollars awarded. The SEC received more than 6,900 whistleblower tips during fiscal year 2020, which represents a 33% increase over the prior fiscal year.

 

One explanation for the increase might be that the fully remote work environment allowed greater opportunity to file complaints privately. Another explanation could be the OWB’s continued outreach efforts and the publicity generated by the number and size of recent high-dollar awards.

 

MORE OPTIONS FOR WHISTLEBLOWERS

 

In addition to the SEC’s whistleblower program, there are other options for accountants who decide to blow the whistle. The Commodity Futures Trading Commission and the Internal Revenue Service have followed the SEC’s lead and have also implemented whistleblower programs. For fraud against the government, whistleblowers can file claims under the False Claims Act. For insider information about bribery of foreign officials, whistleblowers can file claims under the Foreign Corrupt Practices Act. And there are a host of other state and local whistleblower laws that might offer additional protections against retaliation and/or awards for information.

 

Whistleblowers should be protected and rewarded for their courage, not vilified. Unfortunately, whistleblower laws are still complicated and hard to navigate without the help of an attorney. An attorney can not only help whistleblowers find protection from retaliation or help keep a whistleblower’s identity confidential, but also assist a whistleblower in determining whether there might be additional protections other than what is offered by the SEC. Whistleblowers have gained hard-won protections, but the laws are still evolving. It’s still difficult for whistleblowers to navigate the process to avoid retaliation and be rewarded for putting their reputation and livelihood on the line.

 

Patrice Schiano, CPA, CFF, is a doctoral lecturer in the department of public management at John Jay College of Criminal Justice. She can be reached at pschianodial@jjay.cuny.edu.
Arcady Zaydenverg, CPA, CFE, is the managing member at Arcadia Consulting, LLC. He can be reached at arcadyz @arcadiaconsultingnyc.com.
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