The American Institute of CPAs and state CPA societies successfully urged members of the Capital Markets Subcommittee Committee on Financial Services to support an amendment to the Whistleblower Improvement Act of 2011 that would require the U.S. Securities and Exchange Commission to tell audit committees of alleged financial reporting violations reported by whistleblowers. The subcommittee approved the amendment and the bill on Dec. 14, 2011.
AICPA President and CEO Barry Melancon said in the Dec. 12, 2011 letter to the subcommittee that such disclosure is a “critical component in efforts to improve the whistleblower law and thereby protect investors.” The AICPA believes that whistleblowers have played a critical role in discovering wrongdoing in the public securities arena that would adversely impact the accuracy and transparency of financial statements.
Letters to members of the Capital Markets Subcommittee from their respective state CPA societies also supported the amendment to the bill, H.R. 2483, which was introduced by Michael Grimm, a Republican from New York. Seventeen state CPA societies reached out to Members of the Subcommittee, expressing the importance of the whistleblower provision to CPAs in their states.
The bill would generally require notification to the company of whistleblower complaints prior to notifying the SEC regarding violations of the securities laws. With the addition of the amendment supported by the AICPA and the state CPA societies, H.R. 2843 would require notification to the independent audit committee if the allegations were of violations of securities laws related to financial reporting.
Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the SEC to establish a new whistleblower program that will pay awards, subject to certain limitations and conditions, to whistleblowers who voluntarily provide the SEC with original information about a violation of the securities laws that leads to a successful enforcement of an action brought by the SEC that results in monetary penalties exceeding $1,000,000. The amount of the award is required to equal 10 to 30 percent of the monetary sanction.
In its proposed rule to establish the new whistleblower program, the SEC would have allowed whistleblowers to report only to the SEC and bypass a company's internal reporting procedures that may be established by a company, including the procedures that are required under Section 301 of the Sarbanes-Oxley Act.
Concern about the SEC’s proposed rule led the Capital Markets Subcommittee to hold a May 11, 2011 hearing on the whistleblower provisions in the Dodd-Frank Act. Robert J. Kueppers, deputy CEO of Deloitte LLP, testified and presented the profession’s view.
The final rule released by the SEC on May 25, 2011 establishing the whistleblower program calls for direct reporting to the SEC, but provides additional incentives to whistleblowers who report internally first.
The AICPA believes that it is good public policy, good corporate governance, and in the best interest of investors to ensure that allegations of financial reporting impropriety get to independent audit committees and auditors in a timely manner. The AICPA maintains that the SEC should implement the Dodd-Frank Act provision in a manner that ensures audit committees and auditors obtain information from relevant whistleblower complaints and avoid a rule that would bypass or withhold the timely sharing of complaints with them.
It is expected that there will be a markup of H.R. 2483 by the full committee early this year. Assuming a favorable result, floor action in the House should follow. The potential for Senate action is not known at this time.
More information about the SEC’s proposed rule is available in a February 2011 Journal of Accountancy article.