Chapter 12

Duties as a Whistleblower

Like many janitors, Dan works late at night, toiling in relative obscurity. One fall evening, though, Dan became a central figure in one of the biggest sports scandals in American history.1

While cleaning Penn State University's sports facility one day, Dan abruptly froze. His heart hoped he was wrong, but his eyes knew otherwise. He fixated on a horrific sight—one of the Penn State football coaches was molesting a young boy in the locker room shower.

Dan considered all his options, including calling the police and contacting university administrators. But Dan did not work at just any place. He worked at Penn State, a place where football is worshipped as a form of religion, and head coach Joe Paterno presided as the high priest.

Dan knew that if he reported this episode, a scandal might ensue, and his job could be in jeopardy. In a town named State College, Pennsylvania, he also knew that finding another job could become nearly impossible if the university blacklists you. Dan told a few colleagues, but otherwise, he kept his mouth shut. “Football runs this university,” he later told investigators.2

A young assistant football coach named Mike McQueary later witnessed a similar incident, which he reported to the athletic department. The university, lacking a moral tone at the top, turned a blind eye, though. As Dan had suspected, reporting this incident would have proven futile.

Eventually, the media publicized this story, and the public outcry forced the university to hire Louie Freeh, a former head of the FBI, to investigate. After a lengthy inquiry, Freeh declared that “the most senior leaders at Penn State,” including the university's president, “failed to protect against a child sexual predator harming children for over a decade.” Furthermore, he concluded, university officials were more concerned with adverse publicity than with protecting the innocent.3

Ultimately, assistant coach Jerry Sandusky was imprisoned for numerous acts of sexual assault, the university president was forced to resign, a senior vice-president was prosecuted for perjury, and football coach Paterno died of cancer. Reportedly, Dan still has his janitorial job, but even his best efforts can never remove the indelible stain on Penn State's reputation.

WHAT IS WHISTLEBLOWING?

Like basketball referees signaling a foul, concerned employees are said to blow a whistle on foul play when they disclose organizational misconduct to authorities.

Some cases of whistleblowing clearly involve illegal acts, such as dumping hazardous waste in public areas or filing false financial reports with the SEC. If activities violate the law, whistleblowers often disclose these improprieties to the police, regulators, or members of Congress.

Alternatively, when whistleblowers aware of illegal acts fear that government authorities will be unresponsive or ineffectual, they sometimes tip off the media. Perhaps the most famous media whistleblower in American history was known by the code name Deep Throat. Deep Throat was the informant whose revelations to investigative reporters about the Watergate scandal eventually led to President Nixon's resignation from office. Deep Throat's real name remained shrouded in secrecy for over three decades until, shortly before his death, this former Associate Director of the FBI revealed his identity.4

Figure 12-1

In other cases, conduct may enrage a reasonable person's sensibilities, but not be illegal. In these situations, whistleblowers often use the media to create public outcry and consumer pressure. Several decades ago, for example, whistleblowers were outraged that major apparel companies were outsourcing production to suppliers who mistreated workers in Third World countries. By launching a grassroots publicity campaign, whistleblowers and their supporters forced numerous major corporations to adopt and enforce Supplier Codes of Conduct that mandate humane workplace conditions.

More recently, the viral influences of social media have created a new breed of whistleblower, referred to as online whistleblowers. One such whistleblower posted an online video of unsanitary conditions in the restaurant chain where he worked, for instance. By doing so, this whistleblower forced his employer to change its food safety practices more rapidly than teams of county food inspectors could have ever accomplished.

THE TYPES OF WHISTLEBLOWERS

Whistleblowing activity can also be classified based on whether information is communicated either within or outside an organization. When informants report misconduct to higher-ranking authorities within their company or organization, they are referred to as internal whistleblowers. Internal whistleblowing can range from informally telling a supervisor about misconduct to more formal actions, such as filing a written report or calling a company hotline.

Others act as external whistleblowers by disclosing misconduct to others outside an organization, such as the media or regulators.

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Figure 12-2 Who Do Whistleblowers Contact When They Initially Report Misconduct?5

Internal Whistleblowers

The Basics

To encourage internal whistleblowers, many companies in recent years have created various reporting mechanisms, such as tip hotlines. These hotlines sometimes are monitored by a designated compliance officer or by an independent outsider, such as a law firm, to reassure employees that their anonymity will be protected.

In the management accounting profession, accounting professionals are strongly encouraged to abide by their organization's established policies for resolving ethical conflicts. The Institute of Management Accountant's ethics code recites that “communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law.”6 In most circumstances, the AICPA and IFAC codes of conduct similarly impose a duty of confidentiality on accountants working in industry.7 Notwithstanding these official pronouncements, many question whether one has a duty to maintain unwavering loyalty to an employer in the face of possible, let alone palpable, wrongdoing.

Under the Sarbanes–Oxley Act, all publicly traded corporations are required to maintain whistleblower hotlines to facilitate complaints concerning accounting, internal control, and auditing practices. This complaint resolution mechanism must be overseen by the company's Audit Committee, and it must accept and investigate complaints from outsiders, such as suppliers and customers, as well as from employees.

Audit Committees are allowed flexibility in managing and operating these complaint procedures, as long as they take appropriate steps to protect the identities of anonymous tipsters. To ensure that informants remain anonymous, voicemail complaints are monitored by parties outside the firm who will not recognize a caller's voice. Similarly, email complaints must be handled in a manner that masks the writer's identity.

Despite informants' natural preferences for remaining anonymous, most investigators say that they usually are stymied in their efforts to effectuate organizational change unless they have the opportunity to follow up with an informant. As one observer has summarized this issue, “Anyone can show you where the smoke is, but you need more details to find the fire.”

Although the Sarbanes–Oxley Act imposes tough rules to protect employees' identities, it does not mandate any protection for the identities of nonemployees, such as customers, who submit complaints.

If a company fails to maintain a whistleblower system that complies with the Sarbanes–Oxley Act, it may suffer severe penalties, including forfeiting the right to have its securities traded on a stock exchange.

Mandatory Internal Whistleblowing

The American View

If employees observe wrongdoing, most company policies merely give them the opportunity to report misconduct, but do not obligate employees to do so. Other company policies go further, though, by imposing an affirmative duty on certain categories of employees to report misconduct. Usually, companies with mandatory reporting requirements only impose this duty on key financial personnel, such as accountants and information systems personnel. Still other codes of conduct encompass all employees and subject them to possible disciplinary action if they fail to act. Consider, for example, LinkedIn's reporting policy:

If you have knowledge of a potential violation and fail to report it…you may be subject to disciplinary action, up to and including termination of employment. Concerns submitted through the reporting hotline will be reviewed by the General Counsel, an Audit or Governance Committee member and/or others, as appropriate.

The International View

Organizational policies that require employees to blow the whistle are controversial. The European Commission, for instance, compels certain corporate officials subject to its jurisdiction to report suspected illegal activity and professional misconduct. These mandatory whistleblower policies, however, conflict with, and are banned by, worker protection rules established by Belgian and French privacy commissions.8

External Whistleblowing

Statistically speaking, most informants initially air their grievances internally within an organization. Understandably, most people find it more convenient to express their concerns to a work colleague rather than traverse a bureaucratic maze to inform an outside official.

Studies have shown that informants divulge their concerns outside the workplace for three reasons: They anticipate that internal reporting will be futile, they were disappointed by their organization's unresponsiveness to prior expressions of concern, or they want the support provided by a law enforcement agency, such as the SEC.9

To successfully engage in external whistleblowing, potential informants first must identify an appropriate enforcement agency and find the appropriate person within the bureaucracy who is in charge of pursuing whistleblower claims.

Then, potential informants must gather objective evidence that corroborates their claims because outsiders tend to insist, to a greater degree, on receiving solid proof. Due to limited budgets and personnel, regulators and the media often have to ration their resources by focusing only on cases that are well documented and have compelling public policy implications. As outspoken whistleblower Brian Penny puts it, “Blowing the whistle isn't about telling the truth, it's about proving the truth.”10 Professor Joan Sieber echoes this sentiment, stating that, “unfortunately, most whistleblowers are naïve about the precautions they must take, the amount of evidence they must bring forth, and about the fact that virtually no one will be on their side when the case gets underway.…”11

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Figure 12-3 Reasons That Whistleblowers Become External Informants.12(Selected Reasons; Some Whistleblowers Cited Multiple Reasons so Results Don't Sum to 100%)

WHISTLEBLOWER MOTIVATIONS

Whistleblowers are impelled to act for various reasons. Some disclose improprieties in the hope of collecting a financial reward; others have deeper psychological motivations, such as a desire to avenge their employer's abusive behavior. Still other whistleblowers act to preserve their reputations for integrity or out of a selfless concern for others. When whistleblowers predominantly act out of concern for the public, they are referred to as altruistic, or prosocial, whistleblowers.

Consider the case of Sherron Watkins, arguably the most famous accounting whistleblower ever. Watkins is best known as the woman who led to the unraveling of Enron because, after revealing Enron's accounting irregularities to upper management, she informed the company's auditors, and eventually, the world. She acted out of a mixture of motivations. As a result, some view her as a heroic messenger of truth; others say she was a disloyal traitor.

Watkins was a trained accountant who, while working as Vice-President of Corporate Development, prophetically wrote to Enron's CEO that she was “incredibly nervous” that Enron “will implode in a wave of accounting scandals.” Like many corporate employees, Watkins never sought the spotlight. Rather, many say that she principally acted out of concern for her fellow employees and the company that they had worked hard to build. Time magazine, for example, honored her as Co-Person of the Year, hailing her as a modern-day Paul Revere, who sounded warnings of impending company doom.

Despite earning numerous accolades, Watkins undoubtedly also acted out of a self-interested desire to preserve her career and lifestyle. “My 8 years of Enron work history will be worth nothing on my resume,” she wrote, because “the business world will consider the past successes as nothing but an elaborate accounting hoax.” Because Watkins never disclosed Enron's dirty secrets to regulators or Congress, one commentator wrote that she “had a whistle, but blew it.”13

Whatever your viewpoint is, the bold actions of 21st-century whistleblowers such as Watkins clearly helped catalyze companies to improve their internal controls and accounting disclosures. Watkins had the fortitude to act decisively at a time when others at Enron undoubtedly knew the truth but kept their “eyes wide shut.”

The various factors that motivate whistleblowers to act will now be examined in detail.

Revenge

If you have ever been scorned in a romantic relationship or mistreated at work, you likely have experienced the impulse for revenge. Anthropologists have observed that humans' instinctual desire for retribution has existed since prehistoric times. Moreover, modern-day researchers using brain scans have shown that the same brain pleasure centers that become aroused when we ingest sugar similarly become aroused when we contemplate revenge. It perhaps is no coincidence that retribution is often called sweet revenge.

Among primitive social groups, self-administering justice often was the only technique available for promoting social order. Nowadays, though, modern societal structures allow us to avenge perceived acts of personal injustice without physical confrontation or violence. As many angry employees have discovered, becoming a whistleblower provides a nonviolent catharsis for venting resentment.

Although the anticipation and planning of revenge can be pleasurable, researchers have shown that the actual performance of vengeful acts is generally unsatisfying and disturbing. For this reason, many people find it rewarding to contemplate acts of retribution, but not act upon their impulses until their emotions calm down. Although many people have an appetite for swift retaliation, it is often said that “revenge is a dish best served cold.”

Also, by carrying out acts of revenge, people sometimes create negative consequences for themselves over the long run. When people redress a perceived injustice, they often try to act in a manner that is proportionate to the original harm they suffered. The age-old Biblical adage of an “eye for an eye, a tooth for a tooth” has often been mischaracterized as encouraging revenge. In actuality, it merely recited the longstanding tenet of lex talionis, which states that reprisals should always be moderated so they are, at maximum, proportionate to the offense and not excessively punitive. The similar admonition that “punishment should fit the crime” can be traced back to Hammurabi's Code in ancient Babylonia, and it is part of Roman and Islamic law as well.

People, however, often apply different moral calculuses in evaluating whether a reprisal was just. As a result, even if a harmed party tries to calibrate a proportionate response, the original offender may perceive the severity of the reprisal to have been unnecessarily harsh. This causes the cycle of retaliation to escalate, creating fear and anxiety for both parties. Thus, before filing a whistleblower claim to avenge mistreatment, keep in mind that the short-term exhilaration of sweet revenge may leave a lengthy and bittersweet aftertaste. As Confucius wisely once stated, “Before you embark on a journey of revenge, dig two graves.”

In addition, whistleblowers must be careful to only file complaints that reflect good faith beliefs. If a whistleblower's assertions are exaggerated or untruthful, an accuser can be held liable under defamation laws for any harm that results from their false statements.

Reputation Preservation

We all know that every student who lives in the party dorm isn't a raucous partier, and every student who studies computer science doesn't have a robot-like personality. Nonetheless, when particularized data is not readily available, it is common for members of a group to be judged by “the company they keep.”

In the workplace, employees also have to worry that their reputations will be tainted by the misconduct of a few wrongdoers in their subgroup. According to one study, one out of six informants reports organizational misdeeds to avoid guilt by association. These whistleblowers stated that they were acting “defensively” to preempt getting blamed later for others' misconduct.14

Altruism

Whistleblowers often act solely for the benefit of others, fully aware that their actions may antagonize colleagues, impair career advancement, or even destroy their livelihoods. Because whistleblowing often entails huge sacrifices, some have wondered why some people are willing to act for the benefit of others, at great risk to themselves. Whistleblower Brian Penny, who divulged his employer's unethical banking practices, expresses it this way:

We're not snitches. We just see the bigger picture. We're not looking to right every wrong in the world.… Every whistleblower reaches a point where they weigh the good of the few against the good of the many. I don't run around tattling on everyone for every little misstep I see. I'm not a perfect person either. I've done a lot in my lifetime. I've lied. I've cheated. I've stolen. I've bent the rules. I've even broken the occasional law. What I refuse to do, however, is hurt the whole of society for my own personal gain.15

Martin Luther King, Jr. poignantly expressed a similar sentiment:

Our lives begin to end the day we become silent about things that matter.

Collecting Financial Rewards

At the outset, most external whistleblowers act out of a desire to remedy wrongful conduct, not to reap financial rewards. At the outset, external whistleblowers typically rank financial rewards among the least important motivating factors.16 However, as time passes, some external whistleblowers acknowledge that the prospect of collecting a reward helps them overcome their hesitancies.

Several statutes provide financial incentives to whistleblowers.

The False Claims Act

Under the False Claims Act, whistleblowers are entitled to a percentage of the money recovered from wrongdoers who cheat the federal government. The federal False Claims Act also has a unique feature called the qui tam provision. If federal authorities fail to pursue a claim, the informant may act under qui tam, which is an abridged Latin phrase that means “he who acts for the king also acts for himself.” Under this provision, a private citizen can directly sue wrongdoers on behalf of the government without the government's involvement or approval. If successful, whistleblowers who instigate qui tam lawsuits typically retain between 15% and 30% of the government's total recovery, plus their attorney's fees. Over the years, whistleblowers have collected over $2 billion for themselves and shared far more with the federal government. Due to the success of the False Claims Act, many states have enacted similar laws.

The IRS Whistleblower Program

Since shortly after the American Civil War, the IRS has been empowered to pay rewards “for detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws.” The IRS Whistleblower Program has grown over the years and pays informants millions of dollars annually.17

To preserve IRS resources, awards are only granted on cases that involve over $2 million in potential recoveries of tax, interest, and penalties. As one commentator stated, “Like a big game hunter, the IRS pays off only when it snares an elephant.”

Award amounts are set at the discretion of the IRS and are paid only for “solid information, not ‘educated guesses’ or unsupported speculation.”18 Unlike other whistleblower programs, IRS whistleblower filings do not have to be based on private or original information. Rather, submissions can be based on information that is not widely known, and they even can be based on public information. For example, if a parent testifies in a public child custody hearing that his tax return does not reflect his full income, anyone who alerts the IRS about this testimony could qualify for an award.

The IRS vigorously protects the identity of informants. Informants can collect rewards without revealing their identities to the general public by having a designated representative, such as an attorney, collect the reward on their behalf. However, informants risk losing their anonymity if they are compelled to testify in a court proceeding.

During 2013, the IRS paid out over $125 million in whistleblower rewards. However, this statistic is somewhat misleading because this sum principally was received by one man, Bradley Birkenfeld. Birkenfeld was a banker who provided information about his former employer's tax evasion efforts to help wealthy Americans hide their assets and earnings abroad. For his assistance, Birkenfeld individually received $104 million. In celebrating this recovery, Birkenfeld's lawyer applauded the IRS for giving future whistleblowers “104 million reasons” to speak up.19

One of the controversial elements of the IRS Whistleblower Program is that all credible informants can earn a reward, even if they were moderately complicit in the tax scheme that leads to a whistleblower recovery.20 Birkenfeld's huge award vividly illustrates this policy. Birkenfeld actively participated in helping wealthy U.S. clients secretly hide assets in tax haven countries, such as Switzerland and Lichtenstein, and he even admitted to hiding a client's precious diamonds in an empty toothpaste tube to avoid detection. Nonetheless, the IRS did not hesitate to give Birkenfeld his huge reward. He did have to wait awhile to spend it, though, because his illicit involvement also earned him an all-expenses-paid stay in prison.21

The Dodd–Frank Whistleblower Program

The Basic Rules

The SEC is well aware that “fraud related to the preparation of financial statements or issuer reporting and disclosure can be extremely difficult to uncover without the help of corporate insiders.”22 Furthermore, as an SEC Enforcement Director has stated, “The importance of pursuing financial fraud cannot be overstated. Comprehensive, accurate and reliable financial reporting is the bedrock upon which our markets are based.” To assist the SEC in achieving these goals, Congress enacted the Dodd–Frank Act in 2010. This comprehensive act amended the federal securities laws to include a section called Securities Whistleblower Incentives and Protections.23

According to the Dodd–Frank Act, informants who tell the SEC about possible securities law violations may be awarded between 10% and 30% of the amounts recovered as a result of their tip. The exact amount paid out by the SEC depends on the significance of the information received, the degree of assistance provided by the whistleblower, and the public policy importance of deterring the type of violations that occurred. Whistleblowers do not, however, receive any money if the SEC recovers less than $1 million in monetary sanctions.

To be eligible, an informant has to submit information relating to a possible securities law violation by a U.S. company or a foreign company whose financial results are incorporated into a U.S. company's consolidated statements. The reported information must be original information, which means that it was not already widely publicized or known to the SEC. Informants may submit information anonymously, and they do not have to identify the particular law that purportedly was violated. However, the reported misconduct must involve possible securities law violations, such as fraudulent financial reporting, rigged securities prices, insider trading, market manipulation, and Ponzi schemes.24

Although many people assume that whistleblowers usually are company employees, only about 40% of the tips received by the SEC come from current or former employees of a wrongdoer. About 20% are received from company consultants and contractors, and the others predominantly are from defrauded investors and those with close personal relationships to the wrongdoer. Foreign nationals are entitled to recover under the Dodd–Frank Whistleblower Program, and a surprisingly large number of submissions are received each year from countries such as India, China, Canada, and the United Kingdom.25

Understandably, the Dodd–Frank Act prohibits a person from perpetrating a wrongful act and then reporting his own misconduct to collect a reward.

More significantly, individuals usually do not qualify for whistleblower rewards if their job duties routinely involve fraud detection or securities law compliance. The rationale for this exclusion was that individuals who already are being compensated for detecting wrongdoing should not be able to double dip by collecting additional sums. Therefore, law enforcement officials, senior company officials, lawyers, internal auditors, special investigators, and external auditors ordinarily cannot collect rewards.26

Criticisms of the Dodd–Frank Whistleblower Program

Before the Dodd–Frank Act was enacted, many business groups criticized the Whistleblower Program for motivating employees to become disloyal bounty hunters for the SEC. Rather, these critics contended, employees concerned about fixing company problems should be given incentives to walk into their supervisors' offices, not run to federal bureaucrats.

In addition, because informants only collect if recoveries top $1 million, opponents contended that this Whistleblower Program encourages informants to delay reporting until company violations have escalated enough to potentially yield a lucrative payoff. To avoid these perverse effects, critics suggested that discontented employees should only earn rewards if they first file an internal report and their employer fails to correct the problem.

FEATURE IRS DODD—FRANK ACT
Focus Tax violations Federal securities laws violations, including bribery, fraudulent accounting, and insider trading
Submitted Information Secret information or publicly available information Only “original”, nonpublic information
Minimum Threshold for Recovery Over $2 million Over $1 million
Typical Range of Award 15% to 30% of IRS recovery 15% to 30% of SEC recovery
Anonymity Protected? Yes, usually Yes
Protection Against Workplace Retaliation? No Yes

Figure 12-4 Comparison of Whistleblower Statutes.

In response to these concerns, Congress struck a multidimensional compromise. First, the Dodd–Frank Act does not require informants to initially report concerns to their employer, as business groups desired. However, informants do earn an added bonus if they can prove that they first attempted to remedy matters internally before complaining to the SEC.

Also, if an internal whistleblower's actions trigger an exhaustive company investigation, all information that emerges from that investigation is treated as if the whistleblower personally had supplied that information to the SEC. Therefore, if an internal whistleblower's complaint only identifies a small piece of an elaborate puzzle and a subsequent company investigation yields additional evidence of wrongdoing, the size of the whistleblower's award will be based on all discovered information, including information uncovered by the company's own investigation.

Finally, because the SEC sometimes receives multiple complaints about the same violation, informants are often concerned that they will be denied an award if an earlier informant beat them in a race to the SEC's doorstep. To protect employees who patiently try to resolve matters internally, the SEC accords internal whistleblowers a priority right to a reward based on the date of their internal submission, not the date of their eventual SEC filing. For this reason, internal whistleblowers want to carefully document the date of their submission to a company hotline or supervisor, such as by sending a dated email or a certified letter.

ADVERSITIES FACED BY WHISTLEBLOWERS

The Downside of Whistleblowing

“Here's the standard playbook for many companies that suspect and identify an internal whistleblower who may be reporting fraudulent activity: pretend that you take the allegations of the whistleblower very seriously. And then fire the whistleblower.” Regrettably, according to one commentator, this is how many myopic companies treat whistleblowers.27

Whistleblowers who act for the betterment of society deserve commendation, not condemnation. However, the sad reality is that whistleblowers often pay a huge price for their actions. Approximately two-thirds of whistleblowers report that they subsequently were ignored or treated differently at work, half were denied promotions and raises, and one out of six reports that they or their property suffered physical harm.28

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Figure 12-5 1 Out of 5 Whistleblowers Experiences Retaliation.29

In some cases, the consequences of being a whistleblower can be devastating. Cigarette company executive Jeffrey Nigand, for instance, courageously disclosed in a national television interview that his employer concealed the dangers of smoking from the public and deliberately altered product ingredients to make its cigarettes more addictive. Instead of receiving universal praise, Nigand received death threats and even found a bullet in his mailbox, which led him to move out of his home to protect his frightened wife and children. Harry Markopolos, who informed the SEC about Bernie Madoff's fraudulent investment fund, likewise writes that being a whistleblower was a “nightmarish journey” that caused him to fear for his family's safety.30

Even if informants escape major reprisals, they often are punished in subtle ways. Choice work projects may be assigned to others, for instance, and pay raises may evaporate like icicles in the desert sun. Fellow workers also may shun a whistleblower like they avoid their wacky uncle with bad garlic breath at family gatherings.

Despite the adversities that some whistleblowers have faced, some would not hesitate to do it again. Whistleblower Brian Penny expresses his philosophy this way:

Blowing the whistle is like waking up from a coma one day and hearing the most beautiful music. You want to dance, but you can't find anyone to dance with because everyone around you is still asleep. They don't hear the music. You find yourself walking a brand new path no one has ever walked before. Your only weapons are your own perseverance, creativity, and inner strength.

Being a whistleblower brought meaning to my life.… Despite the corruption and evil I've witnessed on my journey, I continue to dance.31

Figure 12-6

Whistleblower Protections

Not surprisingly, the greatest impediment to whistleblowing is the fear of punishment for speaking out. Most people who witness misconduct at work want to correct the situation, but fear for their livelihoods.

Historically, to ameliorate these concerns, antiretaliation laws were enacted to ensure that employees in both the private and government sectors would speak freely about matters imperiling public safety. Antiretaliation laws protecting workers who disclose unsafe conditions involving aviation, the water supply, nuclear power, and military weapons production have been in effect for many decades, for instance.

In the more recent aftermath of various accounting scandals and financial crises, Congressional enactment of the Dodd–Frank and Sarbanes–Oxley Acts has extended similar protections to informants who provide information relating to fraudulent accounting practices and other securities law violations. According to both laws, a company may not “discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate” against employees engaged in protected whistleblower activities.33

The whistleblower rules protect employees who submit erroneous claims, as long as they have a sincere and reasonable belief that their concerns are legitimate. Otherwise, if employers were allowed to punish mistaken employees, a chilling effect would deter employees from coming forward as whistleblowers.

If an employer does engage in retaliation, both laws entitle informants to recover their unpaid wages, plus interest and attorney's fees. The Sarbanes–Oxley Act also makes it a crime for someone to intentionally pursue “any action harmful” to a whistleblower, including interfering with their “employment or livelihood.” A person convicted of retaliation may be sentenced to up to 10 years in prison and $250,000 in fines. If a person is a victim of retaliation at work, both laws require whistleblower claims to be filed within a relative short period after the act of retaliation.

Notably, however, Congress has not enacted antiretaliation protections for individuals who report suspected tax cheaters to the IRS.34

Many companies also establish strict antiretaliation policies in their codes of conduct. Consider, for example, LinkedIn's policy regarding retaliation:

LinkedIn will not retaliate, and will not permit any retaliation, against any individual for filing a good-faith concern to management, the Audit Committee, Governance and Nominating Committee, Vice President, Talent, Chief Financial Officer, General Counsel or the Reporting Hotline, nor for participating in the investigation of any such complaint.

Employer Manipulation of the Antiretaliation Rules

The antiretaliation laws have been carefully crafted to protect employees against trumped-up employer claims.

Pretextual Retaliations

If an employer creates a phony reason for firing a whistleblower, it has violated the antiretaliation laws. To illustrate, assume that an employer claims that it legitimately fired a whistleblower because she arrived late to work three times in one month. If this whistleblower can show that other employees who had similar records of punctuality were not fired for tardiness, she is entitled to recover damages as a victim of retaliation. When employers fire a whistleblower using a phony rationale, or pretext, the employee's termination is classified as a pretextual retaliation.

Retaliations in Mixed-Cause Situations

If whistleblowers have a mediocre work record, it might be difficult to discern whether an adverse employer action was caused by their work record or their whistleblowing activities. Fortunately, the antiretaliation laws give whistleblowers the benefit of the doubt by tipping the judicial scales in the favor of whistleblowers, even if they are not model employees. To benefit from antiretaliation protections, workers just need to prove that whistleblowing activities were one of several contributing factors that precipitated an employer's actions. The employer then has the difficult burden of justifying that it would have taken the identical action against the employee even if no whistleblowing activities had ever occurred.

The Improper Use of Nondisclosure Agreements

Employees potentially face a dilemma if they feel compelled to publicly disclose company improprieties, but company rules or agreements prohibit confidential company information from being divulged. As a typical example, for instance, Bank of America's Code of Conduct states that employees “must keep nonpublic information about Bank of America confidential and secure.”35

To ensure that employees are not deterred from publicly voicing their concerns, whistleblower protection rules make it illegal for anyone to “take any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing or threatening to enforce a confidentiality agreement.”36 Thus, if an employer retaliates against an employee for reporting a securities law violation to the SEC, the employer can be held criminally liable.

Employee Manipulation of the Antiretaliation Rules

When employees are at risk of losing their jobs due to poor performance, they might be tempted to file a whistleblower complaint in the hope of forestalling their employer from firing them.

To discourage this clever but unethical misuse of the whistleblower rules, the antiretaliation rules only protect informants who have a reasonable belief that their employer engaged in misconduct. Thus, if an employee files a frivolous whistleblower claim, they are denied the protections granted to legitimate whistleblowers.

OUTSIDE AUDITORS AS WHISTLEBLOWERS

Divulging Client Improprieties

During the course of performing professional services, auditors sometimes discover evidence that their client committed an immoral or illegal act. When this occurs, does an auditor have the right or duty to inform others about its client's misconduct? Or, should an accountant remain silent?

The American View

As a general rule, an outside auditor may not directly inform the government or the public about client misconduct. In balancing conflicting public policies, Congress and the SEC have decided that the free exchange of information during the course of an audit engagement is of paramount importance, even if protecting the sanctity of the auditor–client relationship might result in a crime going unpunished.

Generally accepted auditing standards are in accord with this viewpoint. One such professional standard states that “disclosure of an illegal act to parties other than the client's senior management and its audit committee or board of directors is not ordinarily part of the auditor's responsibility,” and generally “such disclosure would be precluded by the auditor's ethical or legal obligation of confidentiality.…”37

In restricted situations involving certain securities issuers, however, exceptions do permit auditors, as well as company executives and compliance personnel, to inform the SEC about suspected illegal conduct. The triggering events that may allow auditors and others to directly inform the SEC arise when any of the following are present:

  • A person reasonably believes that disclosure is needed to prevent “substantial injury” to the financial interests of an entity or its investors, currently or in the future
  • A person reasonably believes that an entity is about to impede an investigation, such as by destroying documents or coercing witnesses
  • A whistleblower submitted information internally to a company at least 120 days ago, and securities violations have not yet been corrected38

The International View

The global accounting profession continues to debate when, if ever, the public's interest in discovering illegal acts overrides an accountant's obligation to protect client confidentiality. Some contend that promises of confidentiality are sacred, some believe that accountants should have the right to report suspected illegality but not the duty, and still others contend that reporting suspected illegal acts should be mandatory. Moreover, among those who believe that reporting should be required, there is widespread disagreement about whether only specific kinds of illegality should be divulged or all such acts should be disclosed.

In India, for example, auditors recently became legally required to immediately inform the central government when they have “reason to believe that an offense involving fraud is being or has been committed against the company by officers or employees of the company.”39

Others contend that reporting should go beyond just reporting fraud and should encompass most or all illegal acts. By analogy, advocates for this viewpoint point out that, although there are strong public policy reasons for keeping psychotherapist–patient communications confidential, psychotherapists who believe that a patient is dangerous nonetheless have a duty in most states to inform the police, the intended victim, or both.40 Similarly, in many jurisdictions, medical doctors not only have a duty to report patients who have become unsafe drivers, but may be held liable for injuries caused to others by such a patient if the doctor negligently failed to warn the Department of Motor Vehicles of this danger.41

Because of the wide variations in country laws and within the global accounting profession, it is unlikely that a uniform consensus will emerge that bridges these differences.

Divulging Audit Firm Improprieties

Although auditors generally cannot disclose client improprieties, the Dodd–Frank Whistleblower Program does allow auditors to recover awards for divulging improper conduct within their own CPA firms to the SEC. This misconduct could involve any securities-related matters, such as insider trading, a lack of independence, or noncompliance with other auditing standards. According to the SEC, allowing auditors to blow the whistle on their own colleagues was essential “because of the important gatekeeper role that auditors play in the securities markets.”42

WHISTLEBLOWING IN TAX PRACTICE

The American View

As we have discussed, the IRS Whistleblower Program invites informant submissions. Furthermore, despite the Dodd–Frank Act's general prohibition against auditors becoming SEC informants, tax practitioners and other nonauditors do qualify to collect whistleblower rewards.

Although the IRS and the SEC have put out a welcome mat for tax practitioners, tax accountants nonetheless must carefully consider their duty of confidentiality under the Code of Conduct before becoming a whistleblower. In addition, tax practitioners must be careful to comply with federal and state tax laws that protect taxpayer privacy. For example, under the Internal Revenue Code, tax return preparers who knowingly disclose client information are guilty of a misdemeanor that is punishable by up to one year in prison, a $1,000 fine, or both.43 Thus, a tax return preparer who tells the IRS about a client's illegal tax dodges conceivably could receive harsher punishment than its client!

The International View

To avoid antagonizing the public, tax authorities outside the United States generally have refrained from offering whistleblower incentives or protections to informants. Indeed, when Antoine Deltour, a former Luxembourg PriceWaterhouseCoopers accountant, recently disclosed to the public tax-related client conduct that he thought was unseemly, this so-called LuxLeaker was arrested on charges of trade secret theft and violations of professional secrecy.

This trend, however, may be changing. In 2013, for instance, Canadian tax authorities began offering rewards to whistleblowers under its newly established Offshore Tax Informant Program.

CULTURAL ASPECTS OF WHISTLEBLOWING

Cultural and political factors appear to have a significant influence on whistleblower activity.

As one example, consider how cheating on exams is viewed in different cultures. According to researchers, students in the United States have far less tolerance for classmates who cheat, compared to the views held in countries such as Russia, Israel, and the Netherlands. In a study of global attitudes toward cheating, students in these four countries were asked to evaluate the conduct of students who cheat on exams, as well as the informants who report these cheaters to school administrators. Students in the United States had the lowest tolerance for cheating, and students in Russia had the highest tolerance. Similarly, when asked about informants, U.S. students offered fairly neutral assessments, but students elsewhere expressed disdain for informants, especially in Russia.

Researchers conjecture that these differences are due to the 'U.S. culture of individualism, in which students are encouraged to compete with one another for the best grades and career opportunities. The other countries surveyed have more collectivist cultures. Also, residents of countries with a history of authoritarian governance tend to have great antipathy toward the police and judicial system. Understandably, survey participants in these countries viewed informants with great contempt.44

BIOLOGICAL ASPECTS OF WHISTLEBLOWING

Are some species biologically programmed to risk their own welfare for the good of others? Some scientists believe so and claim that certain members of the animal kingdom instinctively are whistleblowers. They point to several examples.

Consider the vervet monkey. Upon seeing a predator approaching, the vervet monkey shouts a loud alarm call to warn his companions, even though his loud utterance increases the risk that the predator will locate and harm him. The vervet monkey is a classic altruistic whistleblower, willingly sacrificing his own well-being for the good of others.45

The lowly ant also can be a remarkable altruist. To avoid detection by predators, a Brazilian ant species buries the entrance to its colony every night. To ensure that the entrance is completely hidden, a few ants voluntarily venture outside the colony to finish the job, even though this assuredly results in them dying by the following morning. In other ant species, elderly ants instinctively assume the riskiest roles within their colonies as they approach the end of their natural life spans. By engaging in the riskiest activities, such as foraging for food far from the nest, these aged ants safeguard the lives of younger ants.46

Maybe the more important question is: Are humans, like certain other species, preprogrammed at birth to act altruistically, or is self-sacrifice for the benefit of strangers a behavior that must be nurtured through parental teaching and social norms? In a fascinating study of 18-month-old toddlers, researchers placed adult strangers in situations where they needed assistance to pick up a dropped pen or open a cupboard door, and then watched to see if the toddlers would instinctively help them out of their predicament.47 Although the toddlers were not offered rewards or gratitude of any kind, most nonetheless reacted spontaneously to help this stranger in need. In fact, many did so, even though providing help required them to interrupt playing with a fun new toy they had just been given. Based on these results and observations of chimpanzees, the chief researcher concluded that although “there is no doubt that socialization practices can profoundly influence children's basic altruistic tendencies,” our natural tendencies to help others “build on processes that we share with our closest evolutionary relatives.…”48

The biological roots of human altruism have also been observed in the laboratory by neuroscientists. Using brain imaging equipment, behavioral researchers have confirmed that pleasure sectors of our brains become activated when we sacrifice our self-interest for the benefit of strangers. Thus, the next time you make a charitable contribution or open the door for a frail person, others may say that your kindness is heartwarming, but actually your generosity is brain-warming.

The spirit of self-sacrifice for the good of others is perhaps best exemplified by the actions of war heroes, such as former NFL football player Pat Tillman. Tillman had achieved more than most of us could ever dream of accomplishing. He was a famed football player who had movie star looks and earned numerous academic honors at Arizona State University. Many were dismayed when, in the aftermath of the 9/11 terrorist attack, he abruptly left his football career behind to enlist in the military.

“Sports embodied many of the qualities I deem meaningful,” he said shortly after 9/11. “However, these last few years, and especially after recent events, I've come to appreciate just how shallow and insignificant my role is…It's no longer important.” After finishing the 2001 football season, Tillman turned down a $3 million player contract with the Arizona Cardinals to join the Army Rangers, along with his brother Kevin. By doing so, Tillman gave up the fame and comfort of an NFL career to fight for his country. Millions of Americans later joined in unity to mourn his death on the battlefields of Afghanistan, and his memory continues to inspire others to be true champions as they pass through commemorative Tillman Tunnel at his alma mater's football stadium.

Pat Tillman made the ultimate sacrifice, but he died knowing that he had placed principle above personal aggrandizement.

Figure 12-7

ENCOURAGING AN ETHICAL ORGANIZATIONAL CULTURE

Google's Code of Conduct states that its “reputation as a company that our users can trust is our most valuable asset, and it is up to all of us to make sure that we continually earn that trust.” But how does an organization convince its employees to participate in promoting an ethical culture that benefits all stakeholders? Experts suggest that organizations can best encourage internal whistleblowing by implementing the following suggestions:

  • Establish a tone at the top that encourages workers to speak up. At toy manufacturer Hasbro, for example, the CEO writes a regular newsletter feature called Compliance Corner and frequently reminds employees of the importance of ethical conduct. When other toy companies suffered negative publicity for having dangerously high levels of a toxic chemical in their toys, Hasbro did not have this problem. Many attribute this to Hasbro's global commitment to product safety, especially concerning products used by young children.
  • Respond to all employee suggestions, grievances, and reports of misconduct in a timely manner. To encourage employees, an organization has to give employees the satisfaction of prompt feedback.
  • Make adherence to ethical values a performance review criterion. Acting ethically often requires organization managers to reject a short-run profit-making opportunity for the broader good of the firm. For example, if performance is only measured by short-run growth in revenues or profits, a manager might be tempted to bribe a foreign government official, without weighing the long-run consequences of violating the Foreign Corrupt Practices Act. By rewarding employees for ethical conduct, a company gives its workers the incentive to behave in a manner that maximizes the company's goodwill and long-run profitability.
  • Reassure workers that their suggestions and expressions of concern are appreciated. Organizations have to guarantee workers that speaking out will earn them accolades, not disdain. This can be achieved through education, express statements in company employment contracts, and frequent communication. Anecdotal examples about company success stories in company newsletters and meetings help reinforce the company's commitment to an ethical workplace.
  • Reassure organization members that they do not jeopardize their job security and future career advancement by speaking out. Numerous studies have shown that employees are far more likely to speak out about organizational misconduct when they do not fear reprisals. Union members disproportionately become whistleblowers, for instance, because they usually have ironclad job security and union support for their actions. Employees with marketable skills, especially those who are members of a profession, also have a high rate of whistleblower participation because they know that they cannot be readily replaced and are confident that they can find gainful employment elsewhere, if necessary.
  • Remind employees that speaking up is not an act of disloyalty to friends and colleagues. Studies have shown that whistleblowers struggle to speak up out of concern that they are betraying their company and jeopardizing fellow employees' livelihoods. Novelist E. M. Forster once summed up this dilemma as follows: “If I had to choose between betraying my country and betraying my friend, I hope I should have the guts to betray my country.”
  • In many cases, whistleblowers act out of a desire to protect somewhat amorphous societal values, such as fairness and justice, at the sacrifice of the individuals and the organization they hold dear. This is especially true for accountants, where the social value at issue is the rather intangible goal of disseminating accurate information to ensure that financial markets function efficiently. Accordingly, those acting in the public interest must repeatedly be reminded that they are committing acts of bravery, not betrayal.

As Jeffrey Nigand, who disclosed the cancer-causing properties of his company's cigarettes, states: “The word whistleblower suggests that you're a tattletale or that you're somehow disloyalBut I wasn't disloyal in the least bit. People were dying. I was loyal to a higher order of ethical responsibility.”

DECIDING WHETHER TO BECOME A WHISTLEBLOWER

The following checklist may aid you in deciding whether to become a whistleblower:

  • Have I identified misconduct within the organization?
  • Do I have adequate evidence to prove my assertion? If not, can someone else collaborate with me to gather this evidence and act as a cowhistleblower?
  • Is speaking out likely to help correct the situation?
  • Is correcting this misconduct important enough to me that I am prepared to act?
  • Are there any financial rewards or other benefits available to me that give me the incentive to act?
  • What are the risks that the company or fellow employees will retaliate against me?
  • Assuming that the risks of retaliation are unacceptably high, is someone else likely to act if I do not?
  • What can I do to minimize the likelihood of a retaliatory act being successful? Should I report internally or externally? Do I qualify for protection under any laws?
c12f008

Figure 12-8 Should I "Blow the Whistle?"

EXERCISES

General Principles

  1. What personality traits would you expect a whistleblower to typically possess? Do you have those traits?
  2. Two employees at a large nonprofit organization recurrently have observed the Chief Recruiter for their company extend job offers to prospective employees who are members of the Chief Recruiter's ethnic group. Other, more deserving applicants routinely are rejected. The two observers both are contemplating becoming internal whistleblowers. One is a union employee who has been with the organization for 17 years and regularly receives raises in accordance his union contract. The other is a nonunion employee who recently joined the organization.

    Which of these employees is most likely to inform the company's Ethics and Compliance Officer? Why?

    Statutory Incentives for Whistleblowers

  3. Your buddy mentioned that she is thinking about suing under the qui tam law. You are not sure what that is.
    1. What is a qui tam provision?
    2. Can employees who do not work for the government sue under this provision?
    3. Should the IRS offer a qui tam provision to reward citizens who help the government recover unpaid taxes? How many people would you “rat out” if you knew that you could collect, say, 20% of the unpaid taxes, fines, and penalties collected by the government?
  4. Should whistleblower laws be transformed into mandatory rules that impose punishment on any person who has knowledge of a major financial reporting violation but knowingly fails to act?
  5. Should the amount of the reward given to a whistleblower depend on whether the whistleblower acted out of the purest of motives, rather than greed or a desire to impose revenge on an employer or a coworker?
  6. Should coconspirators in any criminal matter be allowed to testify in court? If a whistleblower participated in perpetrating accounting fraud, should she be eligible to collect a whistleblower reward?
  7. The SEC collects millions of dollars in fines each year from securities law violators. Should the SEC use some of these fines to compensate whistleblowers if they are blacklisted from ever working in their chosen occupation again?
  8. “Codes that make whistleblowing mandatory are like generals that send soldiers to get killed. The one giving the order does not suffer any adverse consequences.” Do you agree?

    Internal Whistleblowing

  9. The Code of Conduct in use at a well-known national tax preparation firm says that if you are contacted by law enforcement; a governmental agency such as the IRS, SEC, or FBI; or the media about “actual or suspected improper or illegal activity of any kind by you or anyone connected with the Company, you must immediately report the contact to your manager (unless that would be inappropriate under the circumstances) and the Legal Department.…” Is this Code of Conduct provision ethical?
  10. You currently work in the SEC reporting division of a midsize, publicly traded company. The company has a Board of Directors and an Audit Committee. You have worked there for three years, and you have a cordial but professional relationship with your direct supervisor.

    The company has a hotline for reporting “improper accounting, fraud, embezzlement, and other misconduct.” The hotline accepts anonymous calls and is staffed by a division of a law firm that specializes in ethics and corporate compliance. The company also has a Code of Conduct that strictly prohibits retaliation against any employee who reasonably believes that misconduct has occurred. In each of the following cases, state whether the likelihood of you reporting misconduct to your direct supervisor is Low, Medium, or High:

    1. Late at night, you saw a colleague place an expensive art object from the company's front lobby in the trunk of his car and drive away.
    2. Late at night, you saw the company CEO place an expensive art object from the company's front lobby in the trunk of his car and drive away.
    3. You were asked to improperly classify factory rent in General Overhead. It correctly should be capitalized as an element of Work in Process Inventory. Your colleague told you that, by doing this, the company's Gross Profit Margin on sales would be higher, at least in the short run. This will lead stock market analysts to upgrade the company's stock.
    4. You saw a colleague deliberately book a single sale twice. This results in reported Sales being too high.
    5. You saw a colleague deliberately move a sale from January, Year 2, into December, Year 1, by altering the shipping and invoice dates.
    6. Your company sustained a loss when a burglary occurred. The actual loss was $30,000, but your colleague exaggerated this loss, filing a claim with the company's insurer to recover for a $70,000 loss.
    7. A client offered you a bribe during the course of an audit to “look the other way” and accelerate the recording of an installment sale to a high-risk customer entirely into the year that goods were delivered. Under GAAP concerning sales to uncreditworthy customers, some of the revenue properly should have been deferred until installment payments are received in a later year.
    8. You suspect that a member of your internal audit team accepted a bribe because she has approved of a depreciation method for expected environmental reclamation costs that is grossly incorrect.
    9. A foreign government official demanded a bribe from you to facilitate your company's shipment of goods “rapidly” through their Customs and Importation Department.
    10. You suspect that a partner at your CPA firm is sharing confidential information about one of your clients with an outside investor that is trading the client company's stock.
    11. You witnessed a fellow employee violating the company's policy against using the Internet during work hours.
    12. You witnessed a fellow employee using pirated software at work.

    External Whistleblowing

  11. In each of the cases in the preceding question, what is the likelihood that you would report these offenses to an outside law enforcement agency? State whether the likelihood of you reporting misconduct is Low, Medium, or High.
  12. You work for a metal fabrication company that has a trustworthy system for anonymously reporting accounting improprieties within the company. It has a clear policy that favors internal reporting. Should a whistleblower be allowed to bypass that system and go straight to law enforcement officials?

    Retaliation

  13. What are the advantages of a setting up a whistleblower reporting system that allows individuals to report anonymously? Would a system in which people have to identify themselves be better in any respect?
  14. When you were at the office late at night, you were shocked to see a colleague in the Government Contract Accounting Verification Department make derogatory remarks about a fellow employee's performance. Her comments included a racial slur.

    You informed the company's Board of Directors and filed an email claim with the company's Whistleblower Hotline. You provided your name on your claims. Are you entitled to protection against retaliation under the Dodd–Frank Act?

  15. As a junior staff accountant for a publicly traded corporation, you were shocked when your department head told you to book January sales shipments as if they had occurred in December so the company could “make it rain” in the earlier year. You later learned that “rain” was a company code word for how executives were “showered” with cash bonuses for achieving targeted earnings milestones.

    You made an audio recording of this conversation and sent it to the company's Audit Committee. You did not include a written explanation, and you did not provide identifying information that would enable the Audit Committee to further investigate your claim. Also, you ignored company procedures that state that you must first attempt to resolve issues of this type with “supervisory personnel in your department.”

    If the company discovers your identity and retaliates against you, are you entitled to protection as a whistleblower?

    Whistleblowing in Tax Practice

  16. A prospective new client literally walked up to your CPA firm's reception desk and asked to speak with you. She proceeded to tell you about her “scummy” ex-boyfriend's under-the-table unreported cash income and requested your help in filing an IRS Whistleblower Claim. You reviewed the evidentiary documents, authored the filing, and filed the claim in your own name, with your new client's consent. You have agreed in writing to split any award with your client. You never have had a professional relationship with her ex-boyfriend. Are you legally and ethically allowed to receive and keep your share of the reward?
  17. You filed a whistleblower complaint with the IRS. The IRS estimates that there is an 80% chance that it will be able to recover $3 million from the wrongdoer. The IRS also estimates that it will have to spend $500,000 in out-of-pocket attorney time fighting this wealthy, belligerent wrongdoer in court. In private conversations, the IRS and the taxpayer's representative have discussed a settlement of this matter for $1.9 million.
    1. Would it be rational for the IRS to agree to this settlement?
    2. Is it in your self-interest for the IRS to enter into this settlement?
    3. In performing this analysis, would it be ethical for the IRS to factor in the cost of having to pay you an award? Or, should the IRS make its decision independent of whether or not it will have to share a portion of its recovery with you?

    Comprehensive Problems

  18. When an auditor performed an inventory count at a privately owned medical supply company, it observed that some of the waste from radioactive isotopes produced at that facility three years ago appeared to have leaked into the surrounding soil. The auditor was concerned that these leaks might affect the underground water supply in the community. The company states in its annual audited reports that it is a “model citizen, concerned with maintaining a safe workplace for its employees and a pristine environment for all citizens.”
    1. Do the facts discovered by the auditor affect the client's balance sheet?
    2. Besides possibly adjusting the client's financial statements, what else should the auditor do, if anything?
  19. You are a young accounting staff member at Wackyo.com, a publicly traded company that recently had its Initial Public Offering. When the corporation recently “issued earnings guidance” for the upcoming quarter, you noticed that the company had assumed that sales would increase by 6%, and certain expenses would remain fixed costs. You were quite certain that these costs were variable, not fixed, but your supervisor told you to “fuggetta-bout it.”

    You plan to share your concerns with the SEC and do not intend to first go to the company's Audit Committee.

    1. Do you qualify as a whistleblower under the Dodd–Frank Act?
    2. Do you qualify for protection against employer retaliation?
    3. Did the company overstate or understate its earnings guidance?
    4. If the company had understated its earnings guidance, would you have been equally likely to become a whistleblower?
  20. Matthew Moral, the CFO of Stargem, Inc., a listed New York Stock Exchange media company, faced a dilemma: Should he have certified the reliability of the company's financial statements in accordance with requirements imposed by the Sarbanes–Oxley Act, despite his deep-seated concern that the company's internal controls did not function adequately? Or, should he have just been a team player and signed an officer certification under penalty of perjury? Matthew knew that if he refused to certify the company's financial statements, the stock market would push the company's stock price down, which would hurt many of his friends and colleagues who owned the stock. Also, he would suffer too because his stock options would lose value or even become worthless. He also knew that his “days of keeping his job with the company as CFO would be comin' to an end.”

    After reflecting on this issue, Matthew reached a decision. He wrote a letter to the company's Audit Committee and Board of Directors in which he described three items that he identified as material weaknesses in internal controls. He also stated that he “regretted that he would not be able to certify the company's financial statements before the filing deadline until these weaknesses were corrected.” As he had feared, the Board of Directors immediately fired him. They even had a company security guard escort him out of the office and prevented him from packing up his personal belongings. Also, as expected, the company's stock price fell by almost 20% within an hour of the news becoming public that he had refused to sign the company's SEC filings.

    Later, when he filed a whistleblower lawsuit, he was surprised to learn that the company had accused him of using a “stunt.” They also claimed that his refusal to sign was a “bargaining tactic” to get a pay raise and a generous new contract. The company self-righteously claimed that “it proudly stood up to this CFO's failed blackmail attempts” and that the company's internal controls function entirely properly.

    1. Does Mr. Moral qualify as a whistleblower under federal securities law?
    2. If Mr. Moral had signed the company's SEC filing despite knowing that there were substantial internal control weaknesses, would he potentially have faced criminal penalties?
    3. Is Mr. Moral entitled to antiretaliation protections under federal securities law?
    4. If Mr. Moral's case went to court and you were on the jury, what items would you award him?
    5. By virtue of sending this letter, Mr. Moral suffered public ridicule, lost his job, and had to spend several years fighting for damages in court. Would you have done what he did?

Notes

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