The Whistle-blower and the Fraud Examiner

whistleA regular follower of this blog raised an interesting issue on our Chapter’s website (http://www.cpenet.net) relating to a  whistle-blower whose revelations have lead to an on-going fraud examination;  not only is the whistle-blower a corporate employee, he’s a member of the company’s internal audit staff.  It seems this whistle-blower, prior to his apparently legitimate financial fraud disclosure, was not performing well as an auditor and, our questioner suspects, only blew the whistle to obtain whistle-blower protection and job security at least until the on-going investigation is resolved.

When a whistle-blower is involved at any level of your fraud examination, and especially if you suspect his or her motives, the best advice is to tread lightly, very lightly.  Even indirectly raising questions about motivation in such a situation can be interpreted as a form of retaliation and fuel a lawsuit.  Also bear in mind that many managers become so consumed with rage against any whistleblower that they will grasp at anything that portrays their offending employee in a negative light…understandably counter assertions about “poor job performance”, in the absence of substantive proof, tend not to be taken at face value by the SEC and other oversight organizations in such cases.

Whistle-blower laws allow an employee or anyone who sees some form of wrongdoing to report independently and anonymously that situation with no fear of recrimination against the whistle-blower.  Recriminations can take many forms, ranging from a supervisor’s negative verbal comments to job downgrades or worse.  Per U.S. Sarbanes Oxley Act (SOA) whistle-blower rules, there can be no recrimination against the employee or the whistle-blower can initiate legal action for damages.  Caution your corporate clients that these whistle-blower cases can inflict serious damage on an organization’s reputation as well as on the careers of accused managers.  While whistle-blower programs have been around for years to support federal contracting laws, the SOA moved such rules right into the corporate offices of all publicly traded U.S. companies.  The point to keep in mind is that virtually any personnel action taken against a whistle-blower employee, including a demotion or suspension, can potentially be subject to legal action under SOA.  Any whistle-blower employee who faces adverse employment action could potentially become a “protected informant” witness.  Legal sources have emphasized that this employee protection legislation is extraordinary and underscores the seriousness with which Congress viewed this subject when passing it.

With that said, the fact that the whistle-blower in the present case is a member of the corporate internal audit staff raises an additional issue.  The only reason I can think of why an internal audit staff member would become a whistle-blower (apart from what our blog follower suspects) is that senior internal audit management has failed to include a significant, fraud related finding in an audit report over the objection of the whistle-blower.  An internal audit team is a part of management and individual internal auditors have a responsibility to first report any improper or illegal matters encountered during an audit engagement to internal audit management for disposition.   Only if the internal audit staff member documents and reports an issue, but audit management elects to drop or ignore the matter, does the auditor have the right, and responsibility, to report the matter through the organization’s hotline function (if there is one), to the audit committee or even through the SEC.  Audit management and standards provided by the corporation’s ethical codes of conduct should be in place on the front end  to prevent such a potential whistle-blower situation.

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