Enhanced Protections for Whistleblowers under the Dodd-Frank Act: The Responsibilities, Rights, and Risks of Reporting Fraud
Taylor, Eileen Z., Thomas, Jordan A., The CPA Journal
CPAs play an important role in protecting investors, and their primary duty is to serve the public - that is, all "who rely on the objectivity and integrity of certified public accountants to maintain the orderly functioning of commerce," according to the AICPA Code of Professional Conduct (ET section 53.01). Prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the professional standards dealing with client confidentiality challenged a CPA's obligation to the public and created a significant dilemma for advisors who discovered attempted or actual fraud committed by a client or employer. But because the Dodd-Frank Act is a federal law, it preempts state laws that might have kept CPAs from reporting confidential information; thus, CPAs now have increased protections and can better fulfill their responsibilities to society.
The Dodd-Frank Act was a potent response to a series of corporate scandals - beginning with Enron and continuing through the current economic crisis - that defrauded countless investors and shook the financial markets. One of the Dodd-Frank Act's key provisions required the SEC to establish a whisüeblower program offering significant protections and monetary awards to individuals who report possible violations of the federal securities laws, including misrepresenting or omitting important information in a company's financial disclosures, manipulating tile market prices of securities, stealing customers' funds or securities, violating broker-dealers' responsibüity to treat customers fairly, engaging in insider trading, selling unregistered securities, and bribing foreign officials.
Although CPAs might choose to settle issues internally, there might be times when they choose to report them to an external party in order to maintain professional integrity. In such cases, CPAs should remain cognizant of their potential eligibility to participate in me SEC's investorprotection program. The importance of CPAs coming forward, either internally or externally, cannot be overstated. They can provide businesses and law enforcement authorities with early and invaluable assistance in identifying the scope, participants, victims, and ill-gotten gains associated with corporate wrongdoing. With their help, more violations can be detected and violators can be stopped earlier, which will protect investors and businesses' reputations. The ensuing discussion provides practical guidance for CPAs on the responsibilities, rights, and risks involved in detecting possible securities violations in light of the whisüeblower provisions of the Dodd-Frank Act.
Through the Securities and Exchange Act of 1934, the U.S. government effectively awarded a professional monopoly to CPAs, in return for their promise to protect the public by acting as independent watchdogs over publicly traded corporations. As a result, the public expects auditors to protect it, either by reporting significant illegal acts and suspected fraud or by compelling their clients to do so. Auditors serve as one of the last lines of defense for investors before regulators and lawyers get involved.
But despite a proliferation of new standards regarding auditor independence, as well as other efforts to ensure that auditors perform this gatekeeper role, a long and unbroken series of corporate scandals revealed mat the securities enforcement status quo existing before Dodd-Frank was inadequate. In addition, some have argued that professional standards on client confidentiality promote the auditor-client relationship over the auditor-public relationship (Herbert W. Snyder, "Client Confidentiality and Fraud: Should Auditors Be Able to Exercise More Ethical Judgment?," Fraud Magazine, January/February 2011, pp. 28-30).
The Public Company Accounting Oversight Board (PCAOB) acts as the de facto regulator of professional standards for audits of public companies; for all other engagements, the AICPA's Code of Professional Conduct and GAAS both provide guidance. …