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Dodd-Frank Whistle-blower Bounty Provision

New Career Opportunity: Blowing the Whistle on Your Boss

Whistleblowing can be a noble activity. Cynthia Cooper blew the whistle on improper capitalization practices at WorldCom in the early 2000s and forced the company to disclose the largest financial statement fraud ($11-$13 billion) ever. She received Time Magazine's "Person-of-the Year" award in 2002 for her role as director of internal auditing/whistleblower.

The Dodd-Frank Wall Street Reform and Consumer Protection Act includes an incentive for whistleblowers to spill the beans on their employers. The final rule adopted last week  says that “[y]ou are a whistleblower if, alone or jointly with others, you provide the Commission with information pursuant to the procedures set forth in [the rule] and the information relates to a possible violation of the federal securities laws (including any rules or regulations) that has occurred, is ongoing, or is about to occur.” This definition is similar to the proposed rule but adds “possible violation” language indicating that the final rule does not require an actual violation for the whistleblower protections to take effect. Previously, the SEC used the language “potential violation.” I guess the SEC is trying to ward off complete fraud before it gets out of hand.

To be considered for an award, a whistleblower must voluntarily provide the SEC with original information that leads to the SEC’s successful enforcement of a federal court or administrative action in which the SEC obtains monetary sanctions greater than $1 million. An individual whistleblower may be eligible for an award of 10 percent to 30 percent of the monetary sanctions. To determine whether the $1 million in monetary sanctions threshold has been satisfied (a necessary precondition for award eligibility), the SEC will aggregate awards from separate proceedings that were based on the same underlying facts.

The final rule, with some exceptions, excludes from eligibility original information obtained by a person with legal, compliance, audit, supervisory, or governance responsibilities for an entity, such as an officer, director, or partner, if the information was communicated to the whistleblower through the company’s internal compliance mechanisms, and information gained by an independent public accountant through the performance of an engagement that is required under the securities laws.

Under the final rule, the whistleblower must have a “reasonable belief”  WhistleblowerStar230 that a violation has occurred or is about to occur. The SEC has defined “reasonable belief” as:

• Specific, credible, and timely information.

• Information related to a matter already under investigation by the SEC, but that makes a “significant contribution” to the investigation, or information that was provided through the employer’s internal compliance and reporting system, which is subsequently reported to the SEC by the employer, and which satisfies the first or second part of the definition. The whistleblower protection provisions do not require the whistleblower to have satisfied the eligibility requirements for an award.

The Dodd-Frank Act directed the SEC to create the Office of the Whistleblower, which will control the Investor Protection Fund. The Investor Protection Fund, which has now been fully funded, will be used to pay out awards to eligible whistleblowers.

I have previously blogged about the ethics of whistleblowing. On the one hand it may serve as a deterrent to financial fraud and securities law violations by companies given the broad scope of Dodd-Frank. On the other hand it could lead some employees to spy on company actions, aggressively trace questionable transactions, and gather evidence of wrongdoing even if it has nothing to do with that employee’s job responsibilities. Do the ends of stopping corporate fraud and other wrongdoing justify the means of potentially spying on one’s employer? If we believe such "spying" is wrong then can we apply the "two wrongs do not make a right" thought to whistle-blowing under Dodd-Frank?

Another approach to reasoning out the ethics side of Dodd-Frank whistle-blowing is to evaluate the "ends" as protecting the investing public and society from another possible financial meltdown such as the one that occurred in 2008 and still haunts economic recovery. I buy this explanation of why the Dodd-Frank "bounty" provision is necessary. Personally, I have no confidence that the powers that be in corporate America (i.e., investment bankers, commercial banks, and self-serving CEOs/CFOs) have learned their lesson and reformed their ways. Greed is powerful motive and I've seen nothing to make me believe it is other than an endemic part of capitalism in America today. This version of capitalism is not exactly what Adam Smith had in mind but it is what we are stuck with and extreme measures such as whistle-blower awards may serve as a countervailing force to corporate narcissistic behavior.

 Blog by Steven Mintz, aka Ethics Sage, June 29, 2011