ANTHONY H. CATANACH JR. is an associate professor in the School of Business at Villanova University, as well as the Cary M. Maguire Fellow at the American College Center for Ethics in Financial Services. His professional experience includes five years as an audit manager with KPMG and six years in the financial services industry. Dr. Catanach has received numerous awards for his publication, teaching, and curriculum innovation efforts. He has authored numerous articles on a variety of accounting, finance, and management issues, as well as several business education texts..
Some insiders of business corporations know when others are carrying out untoward actions or are neglecting their affirmative duties with respect to the securities laws. To crack down on fraudulent accounting, society needs to elicit information from these insiders to learn what actually took place. We need to find ways to convert these insiders into whistleblowers!
Jordan Thomas recently spoke at the mid-year meeting of the Forensic and Investigative Accounting section of the American Accounting Association on this topic. Mr. Thomas currently is a partner at Labaton Sucharow, and is the chair of the firm’s Whistleblower Representation practice. Previously, he was an Assistant Director at the SEC, where he had a leadership role in the development of the Commission’s Whistleblower Program. He also led fact-finding visits to other federal agencies with whistleblower programs, ultimately drafted legislation and implementation rules, and briefed House and Senate staffs on the proposed legislation.
Jordan Thomas began his March 30 speech by noting that regulators have a hard time fighting crimes on their own. “The reality is that securities fraud schemes are often difficult to detect and prosecute without inside information or assistance from participants in the scheme, or their associates.” The issue is how to bring these individuals to the table with regulators and prosecutors.
There are always people who observe the shenanigans of these schemers. Whether the fraud was Enron, Fannie Mae, Citicorp, MF Global, or Olympus, there were witnesses to the crime. The point is that we need to protect these witnesses from the fear of retaliation, and we must provide incentives to get them to testify about what they know.
Mr. Thomas noted that after Sarbanes-Oxley, many managers and independent auditors reported compliance with its requirements, and claimed that the scandals of the past were indeed in the past. As we all now know, these assurances were hollow, as evidenced by the Madoff, MF Global, and other recent scandals.
“Conventional reporting mechanisms have been inadequate because witnesses doubt their organizations will appropriately act on internal reports of misconduct and protect them from retaliation.” Genuine fear holds back these potential whistleblowers.
Dodd-Frank attempts to overcome this reticence by offering protections and by supplying incentives. If the employer retaliates, Dodd-Frank provides remedies in terms of double back pay plus interest, reinstatement of seniority, and reimbursement of expenses including attorney fees. As incentive, Dodd-Frank also offers monetary awards equal to 10-30 percent of the monies collected by enforcement agencies.
Such protections and incentives should prove enticing to at least some witnesses and analysts. Jordan Thomas predicts “that in the coming years, many of the SEC’s most significant cases will be the result of whistleblowers.”
Everyone can benefit from the employment protections and the ability to report anonymously. Even the company’s external auditor and members of the audit committee can be whistleblowers, though they may not receive a monetary award unless certain preconditions are present. The bottom line is that everybody can be a whistleblower.
More details can be found on Thomas’ website entitled SEC Whistleblower Advocate.
Mr. Thomas’ speech was followed by a panel discussion on the SEC whistleblower program. Michael Pakter, from Gould & Pakter Associates, LLC, added that assertions of fraud must be investigated by forensic accountants. When taking a lead role, they likely will devise the investigative plan, supervise the investigation, and advise the client about the findings and implications of the investigation.
Also on the panel was Francine McKenna, blogger at re: The Auditors. She mentioned that the PCAOB also has a tips hotline and employees of audit firms can report any issues to the PCAOB directly. She also repeated a comment by Sherron Watkins—if doing the “right thing” is one’s motive instead of money, one can report problems anonymously to Wikileaks. Ms. McKenna concluded by pointing out that OSHA’s record when administering the Sarbanes-Oxley provisions was terrible. It could find merit in only 21 out of 1,232 complaints; worse, OSHA did a lousy job of protecting the whistleblowers.
Let’s hope Thomas is correct and that the Dodd-Frank provisions on whistleblowing will prove a success. After all, none of us wants to see more Enrons, WorldComs, Adelphias, Tycos, Citicorps, AIGs, Dells, ProQuests, GEs, Lehmans, MF Globals, ….
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.
J. EDWARD KETZ is an associate professor of accounting in the Smeal College of Business at Pennsylvania State University. He has a bachelor’s degree in political science, a master’s degree in accountancy, and a Ph.D., all from Virginia Tech. Professor Ketz has been a member of the Penn State faculty since 1981. He also has taught at the University of Connecticut and the University of Maryland. Professor Ketz has authored and edited 17 books including Hidden Financial Risk (Wiley, 2003) which examines the corporate culture and the institutional setting that engendered recent accounting scandals. Dr. Ketz has been cited in the popular and business press, including The Wall Street Journal, The New York Times, The Washington Post, Business Week, and USA Today. He also has appeared as an accounting commentator on CNN, National Public Radio, and Bloomberg Radio.
The whistleblower “protections” in Dodd-Frank (as quoted here) seem horribly inadequate to me. If I’m reporting fraud at my company, what’s 2 years of back pay and reinstatement when 1. the Fraud could bring down the company, and/or otherwise impede its ability to pay me, 2. Reinstatement at a company where I blew the whistle on a fraud thats likely to make me a bit of a pariah (at least to some, both inside the company and at others in the industry)? No thanks, and 3. Two years of back pay when blowing the whistle has a non-zero chance of being blacklisted by other firms?
If I’m risking my career/livelihood by blowing the whistle there better be compensation (one way or another) in it for me to address those concerns, and the D-F “incentives” certainly doesn’t provide me with much incentive in the realm of reality.
I really just don’t see most people with families, mortgages, kids, cars and whatnot trusting that they won’t be somehow screwing themselves over by doing the right thing & blowing the whistle. Its a step in the right direction, but I think people need more certainty they’re not shooting themselves in the foot.
A full-on paradigm shift within the predominate corporate culture AND the accounting industry is a prerequisite to any meaningful increase in the frequency of whistle-blowing. Further, even the most well-written legislation, design to make whistleblowers bulletproof, is absolutely worthless unless two things occur: (1) the law is actually enforced by the administrative agency charged with doing so, and (2) protections under these laws are not coupled with a price tag (you have to hire an attorney before you receive any protection) that is suitable only for the ultra-wealthy.
Dr. Richard Moberly, law professor at the University of Nebraska, has proven, empirically, that the legal protections for whistleblowers found in section 806 of the Sarbanes-Oxley Act of 2002 are ineffective. This is largely due to OSHA’s misinterpretation and application of the law. I have seen no evidence that would suggest that DF will have any greater success – despite the bounties.
My own independent (and informal) research of 29 CPAs (from manager level to CFO) concludes, in no uncertain terms, that CPAs believe that blowing-the-whistle is absolute career suicide. When I asked these CPAs if they would uphold their responsibility (i.e., blow the whistle on instances of discovered fraud/wrong-doing) to the public and capital markets, they had no problem at all saying “no way”. Most asked why they should risk their family’s well-being (as Jordan mentions above) when they know they’ll only suffer loss. They have no desire to be financial kamikaze’s.
Obviously, there are trend breakers, such as the two CPA (out of the 29 I “interviewed”) who said they would do the right thing without regard for personal consequences. It is interesting to note that both of these CPAs held manager level positions (the lowest level of the 29 CPAs that I spoke to).
The first step to converting insiders to whistleblowers is by protecting those who have already blown the whistle. Currently, we do not do that and everyone knows it. Second, is by our profession (i.e., CPAs) taking a clear stance on our commitment to uphold our responsibilities to the public (all stakeholders) and to protecting our own. Finally, we need to create a privately funded organization (no additional government regulation is being suggested) to execute this plan and to monitor the application of laws designed to protect whistleblowers.
Anyone care enough to help execute this plan? jimmy@allenemail.net
I tend to agree with the Jordan and Jimmy. Not only are protections often ill-enforced, but the very nature of most accounting professionals (in my own experience) tend not to want to rock the boat. Family safety and financial security are too important to risk when the results of “doing the right thing” may or may not result in the offenders being disciplined or even found guilty. The whistleblower website offers some helpful information, but it fails to get to the heart of the issue that prevents people from risking jobs and financial stability – no one wants to be ‘that guy’ for the rest of his life.