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Need for PCAOB whistleblower program underscored by recent SEC enforcement actions

A recent massive accounting scandal at KPMG underscores the need for a PCAOB whistleblower program. Photo by Eric Parker, via Flickr (CC BY-NC 2.0)

Recent scandals involving two of the “Big Four” accounting firms have added weight to the need for a robust program to encourage whistleblowers to provide the Public Company Accounting Oversight Board (PCAOB) with information about hidden fraud, similar to the whistleblower programs implemented by the Securities Exchange Commission, the Commodity Futures Trading Commission and the IRS.

The PCAOB is a private nonprofit company that oversees auditors and the audits of public companies, issuers and broker-dealers. The SEC has oversight over the PCAOB’s actions, and the SEC and PCAOB share regulatory authority over auditors.

Last month the US House of Representatives passed a bill, the PCAOB Whistleblower Protection Act of 2019 (H.R. 3625), that would establish a whistleblower program at the PCAOB offering whistleblowers rewards and protection against job retaliation.

Although there hasn’t been any movement on the bill in the Senate, making it unlikely that there will be a PCAOB whistleblower program in the near future, the legislation highlights the need for better oversight and enforcement in this area.

The PCAOB hosts a “Tip & Referral Center” on its website where individuals can submit to enforcement staff information and complaints about potential PCAOB rule violations. But unlike the SEC, IRS and CFTC, the PCAOB does not have regulatory authority to protect whistleblowers from retaliation for submitting a whistleblower claim.

Another weakness in the existing PCAOB program is that individuals who submit information that results in successful recoveries for the PCAOB are not eligible to receive a reward for their assistance. The combination of a lack of protection and the lack of rewards for whistleblowers make it less likely that the PCAOB will receive numerous reports from whistleblowers or the kind of high-quality information that can make whistleblower programs so effective.

The proposed PCAOB Whistleblower Protection Act, which would amend the Sarbanes-Oxley Act, would allow whistleblowers who provide information to the PCAOB that results in a PCAOB disciplinary proceeding to receive an award of ten to thirty percent of sanctions collected when those sanctions exceed $250,000. It also would protect whistleblowers against retaliation from employers. Whistleblowers could anonymously submit information and referrals through a lawyer.

The proposed PCAOB whistleblower program is modeled after the SEC and CFTC whistleblower programs, which have garnered thousands of reports from whistleblowers resulting in over $1.7 billion in monetary sanctions based upon the information and assistance the whistleblowers provided.

Earlier this year, KPMG agreed to pay a $50 million fine to the SEC to settle charges involving KPMG obtaining PCAOB’s confidential list of audits it was planning to review, which KPMG used to improve its performance in PCAOB inspections.

One former PCAOB employee and five former KPMG partners also were charged for their roles in the scheme. All have been sentenced to prison or have pleaded guilty.

In September, PricewaterhouseCoopers paid over $7.9 million to settle SEC charges that it withheld from issuers information necessary for issuers’ audit committees to properly determine PricewaterhouseCoopers’ independence as an auditor in violation of PCAOB Rule 3525, among other allegations..

More needs to be done to help the PCAOB perform its essential oversight and enforcement functions. Offering protection and financial incentives to whistleblowers to encourage them to come forward would be a positive step towards that goal.

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