From the October 2011 issue of Treasury & Risk magazine

SEC Whistleblower Rules Raise Companies’ Awareness

Will agency's rewards undermine companies' anti-fraud efforts?

The Securities and Exchange Commission’s whistleblower rules went into effect in August despite heated opposition from companies. Recent survey data suggest companies are taking the rules, mandated by Dodd-Frank, in stride. But the true test will come when companies see whether the SEC’s bounties interfere with their internal compliance programs.

A survey of board members at public companies released in September by BDO Consulting shows 66% do not expect the bounties to undermine their compliance programs, while 15% see a potential negative impact. On the other hand, 68% of directors would support legislation to require whistleblowers to report complaints internally to collect a reward from the SEC.

Currently, there is no such requirement. Whistleblowers who report violations to the agency will receive 10% to 30% of any penalty the SEC collects. The rules do give employees who initially report a problem to their company 120 days in which to provide the information to the SEC and allow the agency to reward them for first reporting a problem to their company by increasing their award.

Martin Wilczynski, leader of the forensic accounting investigations practice at FTI Consulting, says that while the rules provide some incentives for employees to first report internally, “whether a person reports directly to the regulator or internally will depend on how informed any potential whistleblower is on the rules and the nuances of the program.”

Companies are putting more focus on training employees about compliance procedures and control, he notes. “I think companies will lean toward getting managers and people in oversight positions to really be sensitive to instances where staff raise suggestions or concerns, to make sure that those are funneled in the right direction.”

Glenn Pomerantz, a partner in the corporate governance practice at BDO, questions whether the SEC incentives to report internally will have much effect. “If the employee is concerned the information will no longer be viewed as new information, the employee may perceive themselves as running a risk not to report it first to the SEC,” he says.

Pomerantz speculates that the real problem for companies may be that the SEC, inundated with tips from whistleblowers, will come back to companies for assistance in investigating them, which could mean additional costs for companies.

For an earlier look at Dodd-Frank’s whistleblower provisions, see SEC Bounty Hunters.

 

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