In this article, Alex Viniarsky, a Senior Business
Analyst in our forensic team, discusses the significance of the
SEC's $300,000 award to a whistleblower in an internal audit
and compliance role at a company.
The SEC's whistleblower program was enacted as part of the
Dodd-Frank Wall Street Reform act to award 'high-quality,
original information that results in an SEC enforcement action with
sanctions exceeding $1 million.' The program continues to gain
momentum and break new ground with a recent award of $300,000 to an
employee in the audit and compliance division of a company who
complained to the SEC after the company failed to act on
unspecified allegations provided to the company.
Whilst not the first award of its kind, nor by any means the
largest by quantum, it was the first award to an employee in the
internal audit division of a company.
Compliance officers are often in the best position to observe
and report on insider trading and other securities violations. As
Sean McKessy, Chief of the SEC's Office of the Whistleblower,
Individuals who perform internal audit, compliance, and
legal functions for companies are on the front lines in the battle
against fraud and corruption. They often are privy to the very
kinds of specific, timely, and credible information that can
prevent imminent fraud or stop an ongoing one.
Mr McKessy also summarised the eligibility requirements for an
award to a compliance officer:
These individuals may be eligible for an SEC whistleblower
award if their companies fail to take appropriate, timely action on
information they first reported internally.
Specifically, compliance personnel are ineligible to participate
in the whistleblower program unless they report the apparent
violation internally, then wait 120 days before approaching the
commission1, which is exactly what the whistleblower did
in this case. Unfortunately no details have been published about
the nature of the allegations raised.
One of the hallmarks of a robust and effective whistleblower
regime is that it protects the whistleblower. This means that
published award claim judgements often appear cryptic and opaque.
This is because most of the salient information is redacted to
'protect the confidentiality of whistleblowers and the [SEC]
cannot disclose any information that might directly or indirectly
reveal a whistleblower's identity.'
But in an
interesting twist to this story, the SEC mistakenly included a
case reference number in its initial press release (later
redacted), which linked the $300,000 award to an insider trading
investigation involving clean-air technology company CECO
Environmental. The whistleblower's identity was not directly
We would hope that such a mistake is a one off and won't act
as a deterrent to employees from coming forward, worried that their
identity may be exposed. Such risks may be more present for
employees in the smaller internal audit team of, say, an
environmental company, when compared to that of an external audit
division of an accounting firm.
On the whole, however, this case and the precedent it sets may
very well result in many more employees, in similar compliance
positions, coming forward in the future. This is especially the
case as the SEC has demonstrated that it will apply the 120-day
exception to the rule that compliance officers are ineligible to
participate in the whistleblower program. In turn, this will have
implications for companies, who will now be much more compelled to
take action on internal compliance reporting within 120 days or
risk facing an SEC investigation.
By comparison, Australia's formal whistleblower programs do
not possess an awards regime. An awards mechanism is an additional
incentive, perhaps even a form of whistleblower protection - of a
financial kind - for potentially sacrificing oneself in the pursuit
of altering the troubling status quo at an organisation.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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