When do Accountants' Ethical Responsibilities to the Public Trump
Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. On June 12, 2013, the U.S. Securities & Exchange Commission announced its second-ever whistleblower award under Dodd-Frank. According to the SEC, it received over 3,000 whistleblower tips in the first year of the revamped program, the SEC made its first whistleblower award in August of 2012 and is expected to issue an increasing number of awards in late 2013 and thereafter.
Among other things, Dodd-Frank provides a direct mechanism for whistleblower complaints to the SEC and enhanced protection for eligible whistleblowers that come forward and cooperate in SEC investigations and proceedings involving the corporation that employs them. Dodd-Frank also authorized the SEC to provide incentives in the form of financial awards to eligible whistleblowers that voluntarily provide the SEC with original information about a violation of federal securities laws that leads to successful enforcement proceedings—10 to 30 percent for penalties collected over $1 million.
Whistle-blowing by accountants and auditors is fraught with ethical challenges. CPAs have a confidentiality obligation not to divulge client information. By extension, they have a confidentiality obligation not to disclose actions of their firms that also deal with client matters, such as failed audits. Audits are supposed to seek out and find instances of materially false and misleading financial statements. If an auditor for a firm believes the firm failed in its ethical obligation to do so, then under Dodd-Frank she can come forward and, perhaps, be eligible for a financial award from the SEC.
One question is whether the loyalty obligation in such matters mitigates against any disclosure of fraud and potential whistle-blower awards paid to accountants and auditors? Whistle-blowing violates a prima facie duty of loyalty to one’s employer. There is a duty of loyalty that prohibits one from reporting his employer or firm. However, since it is only a prima facie duty of loyalty, it can be overridden by a higher duty to the public good.
The whistle-blower hopes to stop the game but is that her role? There is no doubt that accountants and auditors must report differences of opinion with management up the chain of command to the board of directors (audit committee) when concerns exist about the accuracy and reliability of the financial statements. However, going outside the entity is a dangerous move because of the confidentiality obligation and that it compromises the trust a client places in accounting professionals.
Is there any way to justify, from an ethical viewpoint, whistle-blowing by accountants and auditors? If there is such a way it would have to be because the public interest demands disclosure. CPAs have a primary responsibility to honor the public trust and act in its best interests. It is hard to justify staying silent when whistle-blowing situations arise after the matter has been discussed with all levels to management and no action is taken.
On a practical level, 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. The whistle-blower risks being ostracized for her actions for a long time to come.
The whistleblower provisions exclude two categories of accountants from award eligibility because of their pre-existing legal duty to report securities violations:
- Individuals with internal compliance or audit
responsibilities at an entity, including CPAs, who receive information
about potential violations, cannot receive whistleblower awards since it
is part of their job responsibilities to report suspicion of illegal acts
to management. However, these individuals will not be excluded from
receiving a whistleblower award where:
- Disclosure to the SEC is needed to prevent “substantial injury” to the financial interest of an entity or its investors,
- The whistleblower reasonably believes the entity is impeding investigation of the misconduct or
- The whistleblower has first reported the violation internally and at least 120 days have passed.
- CPAs who receive information about potential violations of a client or its directors or officers through an audit or other engagement required under the federal securities laws are not eligible to receive whistleblower awards. The SEC included this exclusion so as not to undermine the legal duty that auditors have under Section 10A of the Securities and Exchange Act of 1934 to report illegal acts by officers, directors, and other client personnel up the chain of command. If the issues are not addressed adequately by management, the auditor must then resign from the engagement and file a report with the SEC.
I believe whistle-blowing in the instances described above are ethical practices from a utilitarian perspective that looks at harms and benefits. More harm can come to investors and creditors if accountants are silent and a company’s stock goes south. The costs of violating one’s confidentiality and loyalty obligations are significant. But, the greater good is to disclose the wrongdoing to the SEC.
The SEC protects whistle-blowers in these instances. Moreover, accountants and auditors have remained silent all too long. They are the final line of defense against fraud and the profession’s ethical standards must recognize the obligation to protect the public above all else. In theory, it does. But in practice, a different outcome often occurs.
Blog posted by Steven Mintz, aka Ethics Sage, on September 25, 2013