Katz Banks Kumin partner Alexis H. Ronickher published an article in Accounting Today on September 9, 2015, entitled “Blowing the Whistle as an Accountant.” The article discussed the steps that an accountant should take if she identifies fraud or other financial wrongdoing at her place of work. Read the full text of the article below, or click here to read the article on the Accounting Today website (registration required).
Blowing the Whistle as an Accountant
As an accountant for a public company, you’ve always dreaded this situation. You are going about your day-to-day duties in finance and stumble upon a problem with your employer’s accounting—a serious problem.
Perhaps you realize that the company is improperly recognizing revenue, or you discover evidence of channel stuffing, or you become aware that the value of certain company assets are materially inflated.
Whatever the problem, you know you have to act, either because it is the right thing to do, or because you are required to do so under laws like the Sarbanes-Oxley Act, or because your professional obligations as a CPA require it.
While an employer is never going to welcome news of such a serious problem, some will respond appropriately—first by not shooting the messenger (in this case you), followed by taking measures to clean up the problem. Unfortunately, not all employers are so upstanding. All too often, the only thanks that a loyal employee who reports a serious accounting problem gets is a healthy dose of retaliation, culminating in the loss of his or her job.
Thankfully, there are laws that protect whistleblowers like you from retaliation. The protections these laws provide depend on the type of company you work for, where you live, and what misconduct you are reporting. To help you best position yourself should you find yourself blowing the whistle on faulty accounting, this article will briefly explain some of the most common legal protections for accountant whistleblowers. It will then provide some tips on how to best position yourself to be protected under those laws and how to avoid common pitfalls that might limit those protections.
The critical question regarding what laws protect you is whether your employer is a publicly traded company, or one of certain types of contractors performing services for publicly traded companies. If you work for a publicly traded company, the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act offer whistleblower protections. Both SOX and the Dodd-Frank Act protect whistleblowers from not just termination, but lesser forms of retaliation, such as demotions and harassment.
Both laws provide for reinstatement and recovery of economic losses, emotional distress, reputational harm, and attorney’s fees and costs. As a further disincentive against retaliation, the Dodd-Frank Act also provides for recovery of twice a whistleblower’s back pay (economic losses from the time of termination through trial).
If you work for a private employer, you may have legal protections, but it depends on where you live and what you are reporting. The majority of the states protect employees who blow the whistle on unlawful conduct from wrongful termination, although states vary widely as to the scope of these protections. A few states even have specific statutes that protect whistleblowers from other retaliatory acts short of termination.
In some states, however, your report must relate to the violation of a state law (not federal), sometimes explicitly a criminal law. Some states also only protect you if you reported the misconduct externally to law enforcement or appropriate state regulators. If you have a legal claim under the laws of most states that prohibit wrongful termination, you can recover for economic loss, and sometimes for emotional distress and reputational harm.
Some states even allow you to sue for punitive damages—damages designed to punish the wrongdoer—which can result in sizable awards for the whistleblower if the lawsuit is successful. Given the variance in state law, if you work for a non-publicly traded company and are thinking of complaining up the chain of command about what you perceive to be unlawful accounting practices, you should consult with a whistleblower attorney before you take any action.
Blowing the Whistle Safely
Report a violation of law, not accounting principle: The law protects whistleblowers who report violations of laws or who refuse to engage in unlawful conduct. It is critical for a whistleblower reporting an accounting problem to make clear that the issue is more than simply an accounting error, but involves actual or potential violations of law.
For example, SOX and the Dodd-Frank Act protect you only if you are reporting conduct you reasonably believe constitutes mail fraud, wire fraud, bank fraud, securities fraud, shareholder fraud, or any violation of a Securities and Exchange Commission rule or regulation or other law designed to protect shareholders. Most significant accounting problems, however, fall into one of these protected categories.
SEC rules and regulations not only prohibit fraud on investors, but also require publicly traded companies to make and keep books, records and accounts that are accurate and fairly reflect the company’s transactions and the disposition of its assets. The SEC also requires publicly traded companies to maintain internal accounting controls sufficient to provide reasonable assurance that transactions are recorded as necessary to permit preparations of financial statements in conformity with GAAP and to maintain accountability of assets.
When reporting what you believe to be accounting practices that would mislead shareholders, it is best to specifically state the accounting problem could be fraudulent, and might result in the company being in violation of SEC rules and regulations. While making such statements inside the company is never easy, explicitly grounding your report in the legal categories protected under SOX and Dodd-Frank will serve to better protect your position by firmly establishing that SOX and the Dodd-Frank Act protect you.
Likewise, if you work for a non-publicly traded company and are reporting an accounting problem, you need to determine if the conduct violates any law. A typical example of such a law is fraud—which may also be a criminal violation—so even in states that require a criminal violation, you are more likely to be covered.
Your belief has to be a reasonable one: Under almost all whistleblower laws, you are protected as long as you reasonably believe that the conduct was violating the law, even if you end up being wrong. As an accountant, however, you may be held to a higher standard of reasonableness. While a court will not likely expect you to be a securities or criminal law expert, it will expect you to understand accounting principles and their implications.
Report in writing to someone who can address the problem: The substance of your report is critical. Employers frequently defend themselves against retaliation claims by arguing that the employee never reported legal violations, but instead simply pointed to a potential accounting error, complained about a business decision, or merely advocated another accounting treatment. By reporting your concern in writing, you will avoid any he said/she said situation with regard to the substance of your report. Your report should be specific about the facts at issue and why you believe the company’s conduct may violate the law. Do not combine the report with complaints about other topics, such as personality conflicts. Since the report will become critical evidence if your employer retaliates against you, you should make sure that the tone of the report is professional and not insubordinate.
This report should be made to someone who can address the problem, such as a supervisor or a compliance officer. Reports to co-workers will generally not be sufficient to provide you with legal protection. Keep in mind that under some laws, you are protected only if you report the problem externally to law enforcement or other appropriate officials.
Be careful about taking documents: Once you discover a problem, it can be tempting to launch your own clandestine investigation into company files to uncover the extent of the problem. Such a campaign, however, can backfire and jeopardize your legal protections. You can generally review documents to which you have access in the normal course of business, but if you search through a document that you do not have a right to access, you may be giving the company a non-retaliatory basis for terminating you. In addition, if the company tells you to halt any further investigation or analysis into the matter, you generally should comply. While the law is not crystal-clear on the matter and arguments can be made to defend your further investigation, especially if you are considering reporting your concerns to the SEC, you will be in the strongest position if you fully comply with the company’s orders.
It can also be tempting to retain incriminating company documents if the company discharges you after you have blown the whistle. Again, the law is not settled as to the exact parameters for when a whistleblower can retain documents supporting his or her claims, so it is best to consult with a whistleblower attorney regarding this issue.
You’ve Been Terminated. What Are the Next Steps?
What happens if you blow the whistle and, despite following the advice above, your employer still terminates you? Seek legal representation as soon as possible. Some laws, such as SOX, require you to take legal action within 180 days of termination (or other retaliatory act). Also, do not sign a severance agreement prior to discussing your case with an attorney who has experience in the representation of whistleblowers. Such an agreement will almost surely release all claims you have against your employer, and depending on the facts of your case, you may have a strong claim for far more compensation.
At the same time, while it may be hard, you need to start looking for a new job, at the same time that you pursue a remedy for your wrongful termination. At least in relation to a former employer whom you are seeking to hold responsible for the economic harm of your termination, you have a legal obligation to make a good-faith, reasonable effort to secure new employment, although you are not required to accept any job that presents itself. The job needs to be substantially equivalent to the one you lost. You should keep detailed records of all job search efforts.
Finally, if you worked for a publicly traded company, depending on the nature and scope of the misconduct you reported, you may have a viable whistleblower tip under the SEC’s whistleblower reward program. The SEC Whistleblower Office provides awards of 10 to 30 percent of the amount of sanctions and penalties the SEC imposes on wrongdoers as a result of a whistleblower’s information. Submitting an SEC tip is not limited to whistleblowers who have been terminated, but the program does provide certain incentives to individuals who first reported violations internally, and the SEC does have the ability to investigate and penalize companies for retaliating against whistleblowers.