When a whistleblower goes to a government agency with allegations of fraud and corruption, no one knows whether the government will act. The more detailed and credible the allegations, the more likely the government will ask questions. The company may even have the great “fortune” of being subject to a full-blown government investigation.
Because of the uncertainty, companies must take whistleblower allegations seriously and take appropriate steps to investigate internally. They cannot afford to sit around and hope the whistleblower report goes nowhere, because inaction could lead to harsher penalties. The public company highlighted in the case study below did an outstanding job of handling allegations by a former employee, so when the government came knocking, the company was in an excellent position.
Initial Allegations
Management is often concerned about the possibility that a “whistleblower” may make false reports to government agencies. While that is a legitimate concern, the more pressing issue is the possibility that a whistleblower makes an accurate report of fraud to the government.
False allegations require some time, expense, and effort to debunk, but ultimately the innocent company is in a good position. True allegations of fraud, misappropriation, and other bad acts are going to cost a company far more, so quickly dealing with any allegation immediately becomes more important.
Companies should have policies and procedures in place to guide the evaluation of whistleblower allegations, with increasing effort dedicated to the claims as the seriousness and credibility of the claims increase. In other words, allegations with no apparent credibility will likely be handled internally and quickly closed. On the other end of the spectrum, allegations that are initially evaluated as serious and credible will require quick escalation to a full-blown investigation.
Reports of Fraud
The company in this case study took an efficient and effective approach to whistleblower allegations. A supervisory employee in the company’s accounting department was having performance problems, and was warned that she was in danger of losing her job. She responded with a whistleblower letter to the Securities and Exchange Commission, the board of directors, and the independent auditors. She stated that she was quitting her job because of serious accounting fraud within the company.
Upper management immediately evaluated the allegations, and determined that they were without merit. The situation was a little tricky, however. Most of the allegations related to issues that the company had already identified, disclosed, and remediated. While there was nothing new or credible in the letter, management knew that the SEC was likely to take the allegations seriously based on the details contained in the letter.
The board of directors determined that an independent investigation of the allegations should be done. They wanted an unbiased analysis, and retained outside counsel and a forensic accountant to investigate. Management gathered documents relevant to the allegations, and gave the investigator access to all employees and accounting records.
Investigation Results
The investigator found that there was no merit to any of the allegations of the whistleblower. While she identified some legitimate financial reporting issues within the company, they were previously disclosed in SEC filings, and remediation efforts were well underway. One by one, the issues raised by the whistleblower were refuted, and there was nothing to indicate that the company was engaged in accounting fraud.
Less than a week after a report on the independent investigation was submitted to counsel, the SEC made contact with the company and began an informal investigation into the issues. The company’s quick action and full investigation of the allegations gave them immediate credibility with the government investigators.
Doing It Right
The company in our case study did several things right, even before the “whistleblower” came forward with her allegations. Other companies can learn from these things that put the company in an excellent position from the start of the government inquiry:
- Management identified the company’s financial reporting problems long before the whistleblower came along, and had made substantial steps toward correcting the problems.
- Issues that were raised in the course of business were investigated and changes were made based on the findings.
- Outside lawyers and consultants were retained to provide opinions and valuations to ensure that financial statements and disclosures were accurate.
- Substantial changes were made in the accounting department to ensure that transactions would be recorded correctly going forward.
- Documentation on the corrective actions was maintained to demonstrate that management was thoroughly examining issues and following authoritative guidance.
- The forensic accountant was given unlimited access to people and documents in order to properly complete an independent investigation.
- Management and the board of directors did not attempt to sway or influence the investigation or final report.
Most importantly, management and the board of directors took swift action as soon as the allegations were made by the purported whistleblower. By beginning immediately, the company was able to complete an independent investigation before the government got involved, lending more credibility to the findings. If the investigation and the findings had been delayed until after the SEC became officially involved, the results may have been viewed skeptically by the government.
Evaluating the whistleblower allegations has been costly for the company. Not only did the company incur the cost of the independent investigation, management will still have to commit time and money to complying with requests from the SEC. However, there are costs and hazards with being publicly traded and being subject to many regulations.
This case demonstrates how important it is to take whistleblower allegations seriously, even if management has knowledge that the allegations are false. Management knew the government might consider the whistleblower letter credible because of the details provided and the manner of presentation. They quickly engaged an independent forensic accountant to evaluate the allegations and report the findings to counsel and the board of directors. This case was handled properly, and as a result, the company is in an excellent position regarding the SEC’s inquiry.
Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted hundreds of high-stakes investigations involving financial statement fraud, securities fraud, investment fraud, tax fraud, and criminal defense. Tracy is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts. She can be reached at tracy@sequenceinc.com or 312.498.3661.
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