Internal audit and compliance – SEC awards more than $300,000 to whistleblower with audit responsibilities

Background

The Securities and Exchange Commission (SEC) announced an award of more than $300,000 to a whistleblower whose high-quality information and continuing assistance significantly contributed to a successful enforcement action. In 2010, Congress enacted the whistleblower-reward provisions in the Dodd-Frank Act to “motivate those with inside knowledge to come forward and assist the Government to identify and prosecute persons who have violated securities laws and recover money for victims of financial fraud.”

Internal Audit and Compliance

The whistleblower became aware of the potential securities law violations in connection with audit-related responsibilities. Although individuals with audit or compliance responsibilities are generally not eligible for awards, a whistleblower who reasonably believes that an entity is engaging in conduct that would impede the investigation falls within one of the exceptions to that rule.

In this matter, the whistleblower had a reasonable basis to believe the entity would impede the Commission's investigation.  This is the fourth time the agency has paid a whistleblower with internal audit or compliance-related responsibilities.

"This award is an example of the important role that audit and compliance professionals can play in assisting the Commission's enforcement efforts, especially when the entity is attempting to thwart an investigation," said Jane Norberg, Chief of the SEC's Office of the Whistleblower. "The whistleblower attempted to remedy the conduct and provided exceptional assistance to the enforcement staff."

Myth and Reality

Furthermore, internal auditors, compliance personnel, external auditors, officers, and directors, may incorrectly assume that they are not eligible for awards under the SEC Whistleblower Program. Under certain circumstances, however, compliance and ethics personnel can be eligible for SEC whistleblower awards.

SEC Chair Mary Jo White noted in a speech: Whistleblowers have provided us with original information leading to the opening of new investigations, “insider” views as to how a company approaches its disclosures to investors, and highly technical analyses of rapidly evolving fraud schemes. Whistleblowers have also testified at TRO or asset freeze proceedings, enabling our staff to stop fraud schemes before investor losses mount; they have identified additional witnesses and encouraged those witnesses to come forward, and they have explained documents to enhance our understanding of cases.

The Exceptions - Securities Whistleblower Incentives and Protection

The exceptions to this rule, found in  Section 21F-4  of the Securities Exchange Act, allow employees whose principal duties involve compliance or internal audit responsibilities, employees of public accounting firms, and even the officers, directors, trustees, and partners of the relevant entity to report to the SEC and receive awards under the program if:

• They reasonably believe the disclosure is necessary to prevent conduct likely to cause “substantial injury” to the financial interest or property of the entity or investors;
• They reasonably believe the entity is engaging in “conduct that will impede an investigation of the misconduct”; or
• At least 120 days have passed, either since they properly disclosed the information internally or since they obtained the information under the circumstances indicating that the entity’s officers already knew of the information.

If one has evidence of tampering with an internal investigation, they are permitted to report to the SEC immediately. This improper conduct may include destroying documents, influencing witnesses, or otherwise concealing material information.

The 120-day exception does not apply to external auditors who obtained the information during their audit of an issuer. Instead, those external auditors can report to the SEC immediately after they inform a superior in their accounting firm about improper or illegal client activity and the accounting firm fails to promptly report that information to the SEC. The first two exceptions also apply to external auditors when the violation is “material.”

Closing

The SEC has awarded more than $700 million to whistleblowers since the inception of the agency’s whistleblower program in 2011. The number of tips in 2020 were approximately 6,900, which is more than 30% increase from 2019, with approximately 80% reporting their concerns internally.  In recent years, on average, 19.3% of all SEC whistleblower tips have involved corporate disclosures and financials.

According to the SEC, whistleblower tips have been submitted by individuals in 114 foreign countries between fiscal years 2011 and 2018. The top five were the United Kingdom (523), Canada (446), China (278), Australia (243), and India (213). This data is from the date the whistleblower rules became effective on August 12, 2011, through the end of fiscal year 2018.

For additional insight, visit Board and Fraud.

For more information on this topic, or to learn how Baker Tilly specialists can help,  contact our team.