House Financial Services Panel Looks at Dodd-Frank Whistleblowing Rules

May 25, 2011

At a Congressional hearing on whistleblower provisions of the Dodd-Frank Act, Robert Kueppers, deputy CEO and vice-chairman of Deloitte LLP, testified about the accounting profession’s concern that the Act’s whistleblowing provisions do not adequately take into account the internal reporting system requirements imposed by the Sarbanes-Oxley Act of 2002. Rules to implement the Dodd-Frank provisions could weaken companies’ internal controls over financial reporting, which management must assess and to which external auditors must attest.

“The Committee did not spend enough time considering the whistleblower provisions before they were signed into law,” said Representative Scott Garrett, a New Jersey Republican and chairman of the House Capital Markets and Government Sponsored Enterprises Subcommittee. “Although well-intentioned, thousands of people and companies have commented to the SEC regarding the serious negative consequences of the proposed whistleblower rules.”

Comment letters from the Chamber of Commerce, the AICPA and the Center for Audit Quality strongly urged the U.S. Securities and Exchange Commission and Commodities Futures Trading Commission to require concurrent whistleblower reporting to the entity and the respective Commission as a condition for a whistleblowing award. Under Dodd-Frank, company employees who take evidence of fraud directly to the SEC and CFTC would become eligible for a financial reward.

“The whistleblower program should be implemented in such a way as to establish a constructive balance between strengthening the operation of effective internal compliance programs, and encouraging timely whistleblowing to the SEC,” Kueppers told the subcommittee. “We believe that this could be achieved by a requirement, as a condition of eligibility to receive a monetary award, that whistleblowers report their concerns fully and in good faith through company-sponsored internal compliance systems before reporting to the SEC; alternatively, at a minimum, we believe concurrent reporting to the SEC and internally should be required.”

Representative Garrett said lawmakers are sympathetic to the accounting profession’s concern that the SEC’s proposed whistleblower rule would result in individuals bypassing internal controls and going straight to the SEC with their concerns. By going straight to the SEC, this may trigger less accurate financial statements and cause an increase in restatements of financial statements upon which investors have already relied, Garrett said.

Draft legislation to improve the Act’s whistleblower provisions is being sponsored by Representative Michael Grimm, a New York Republican who serves on the House Financial Services Committee. The SEC has announced it will hold an open meeting on May 25 to consider whether to adopt a final rule to implement the whistleblowing provisions of the Dodd-Frank Act.

Additional information is available on the AICPA’s advocacy website.