The Fine Art of Whistleblowing

By Parisi, Ronald C. | The CPA Journal, November 2009 | Go to article overview

The Fine Art of Whistleblowing


Parisi, Ronald C., The CPA Journal


How to Keep Someone Else's Misconduct from Becoming Yours

Harry Markopolos made a name for himself as the whistleblower who, for several years, pointed out the Bernard L. Madoff Ponzi scheme to SEC investigators. Unfortunately, they did not fully grasp his warnings. And while the Madoff case is the most notorious, it is just the latest in a succession of financial scandals in recent U.S. history.

Tyco, Enron, WorldCom, the United Way, the American Red Cross, and the Nature Conservancy: A common thread in all of these cases is whistleblowing. In its simplest form, whistleblowing involves the act of reporting wrongdoing to internal or external parties. Of particular relevance to CPAs is external whistleblowing, the notification to outside parties.

Whether one believes that whistleblowing is or is not part of a CPA's job, surveys of the public at large indicate that most believe that CPAs have a moral duty to ensure accuracy, assure client honesty, and detect financial statement fraud. In other words, if a CPA is involved in a lawsuit alleging fraud (which happens more often than most CPAs realize), a jury is likely to believe that the CPA had a duty to blow the whistle.

Work Responsibilities and Ethical Duties

A 2006 U.S. Supreme Court decision (Garcetti v. Ceballos, 547 US 410) regarding public employee whistleblowing renewed debate about work responsibilities and ethical duties. The decision, which denies public employees constitutional protections when performing whistleblower duties as part of their jobs, is bound to have an effect on others - such as CPAs - who are often expected to blow the whistle on behavior they consider suspicious.

The Court's decision is limited to public employees, but it sets a standard for evaluating other work-related cases. In Garcetti, if an employee has whistleblowing duties, the performance of those duties is not constitutionally protected free speech. Work speech is not equivalent to speech in the public square. Work-related whistleblowing must not be misguided or do more harm than good.

The message to accountants who are expected to carry out whistleblowing duties when performing audits and other attestation services appears to be to exercise even more care when deciding what to do in ethical conflicts. This is small comfort to CPAs, who are already under pressure to live up to public expectations that are usually higher than codified professional standards.

The standard to protect the public interest may require a CPA to decide whether to inform third parties, as well as clients, of significant matters. For example, a CPA may be trapped between a client who is behaving suspiciously and third-party investors or creditors who are relying on the CPA to report such behavior. The standard to uncover fraud regardless of the services rendered is heightened by the expectation that the CPA will "get it right" when blowing the whistle on what appears to be fraud.

Failure to Blow the Whistle

Whistleblowing obligations can be further complicated by CPAs' duties to protect confidential client information. Many situations are difficult to navigate, so CPAs are advised to consult with a professional liability risk advisor or attorney before taking any action.

Consider the following actual case where a CPA was engaged by the general partner of a limited partnership to audit the partnership's financial statements. During the audit, the CPA became aware of significant differences between the financial statements obtained from the general partner and those obtained from one of the portfolio companies. After further examination, the CPA advised me general partner that he should be concerned about the possibility of fraud.

Although the CPA had indicated his suspicion of fraud to the general partner, he did not communicate this to the limited partners, nor did the CPA contact and advise the partnership's legal counsel. …

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