Dodd-Frank whistleblower: A philosophical change, or is the government fed up?

The views expressed here aren't necessarily those of the ACFE, its executives or employees. – ed.

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They decided to police themselves not only because it was the right thing to do but because they knew the government wasn't going to go away anytime soon. We began to see a new era of cooperation between corporate America and the government, which applauded the defense industry's efforts. Since then, the Department of Justice Civil Division has reported a decline in the number of new defense industry matters, which include newly received referrals, investigations and qui tam actions. 

FSGO USES CARROTS AND STICKS

In 1991, we saw the implementation of the Federal Sentencing Guidelines for Organizations (FSGO) that laid out expectations for corporate ethics and compliance programs. This carrot-and-stick approach rewarded companies for implementing effective compliance programs while allowing for more severe punishment for those who chose not to. This is another example of the government's position of wanting companies to police themselves.

In spite of the FSGO, in the 1990s we witnessed an onslaught of health care fraud. Again the government cracked down, and again we saw the industry react by working with the government to develop accepted compliance practices for the various players — payers, providers, home health agencies, long-term care, etc. — to police themselves.

POWERFUL FALSE CLAIMS ACT

It's open to debate whether these compliance activities have worked because we still regularly see health care fraud headlines, and the government continues to fund resources to deal with a multibillion-dollar problem. The government recently announced that of the $3 billion it recovered under the False Claims Act, $2.4 billion was related to health care fraud, which further supports the view that corporate America may not be able to police itself.  

For the last decade or so, the whistleblower provision of the False Claims Act has been a powerful tool to ferret out wrongdoing. However, the Dodd-Frank Act's whistleblower provisions, on their face, don't necessarily encourage employees to first report to their employers. In most cases, otherwise loyal employees who raised whistleblower cases engendered by the False Claims Act have first tried to resolve their issues within their companies to no avail.

SOX EMPHASIZES RESPONSIBILITY

We all recall Enron and the government's response in its aftermath: the Sarbanes-Oxley Act (SOX). Passed in 2002, SOX requires all companies to take a hard look at their internal controls and for top company executives to sign off on the adequacy of those controls. It was yet another message from the government that it expects companies to police themselves.

Even with the SOX requirements in place, the number of financial restatements in 2010 remained higher than in 2002, according to Audit Analytics' "2010 Financial Restatements – A Ten-Year Comparison," released in May 2011.  While the number of restatements increased, the severity decreased, according to the report. One could argue that the decrease in severity is a direct result of SOX. The act also provided further protection for whistleblowers, but it didn't go as far as encouraging employees to approach the government.

AND NOW DODD-FRANK

In 2008, the financial crisis came to a head and continues to cause pain. The result has been more government intervention and legislation. Sen. Chris Dodd (D-Conn.) and U.S. Rep. Barney Frank (D-Mass.) sponsored the Dodd-Frank Act with far-reaching reforms. Its whistleblower provisions encourage individuals to bypass normal reporting channels and go directly to the Securities and Exchange Commission (SEC) with the possibility of collecting a huge bounty.

Since Dodd-Frank's passage, the SEC guidelines now state that it's okay to first go to one's employer, but the SEC clearly doesn't encourage that. The SEC has made it easy to file a complaint via its whistleblower complaint website. The government now seems to be sending the message that it no longer trusts corporate America to police itself. On the surface, this may seem like a shift in the government's philosophy. However, the threat of employees bypassing internal reporting mechanisms may just encourage companies to up their game by redoubling their self-policing efforts.

While the whistleblower provisions will create more bureaucracy (the SEC's Office of the Whistleblower has ramped up its personnel complement) and more headaches for cash-strapped companies, the result may be that companies will more diligently endeavor to ferret out fraud and improper activity within their organizations.

The SEC, in its November 2011 annual report on the Dodd-Frank Whistleblower Program, indicated that it had received 334 tips since the rules were finalized on Aug. 12, 2011. The SEC may not have the capacity to deal with such a high level of complaints in a timely fashion. Because the SEC doesn't want to be accused of sitting on information that could be detrimental to the investing public, it will likely send messages to the accused companies outlining the whistleblower allegations with "requests" for independent investigations that will undoubtedly include close government oversight and scrutiny.

INTEGRITY AND TRUST

The U.S. federal government traditionally has attempted to encourage companies to police themselves. Our country has been built on the pillars of integrity and trust. However, the Dodd-Frank Act possibly signals a departure, which apparently encourages citizens to circumvent that trust, bypass their employers and head straight to the government with their allegations.

Hopefully, the act's whistleblower provision will force corporations to do what they should have done years ago: develop and implement ethics and compliance programs that include a strong and consistent "tone at the top," which clearly doesn't tolerate wrongdoing.

As CFEs, we'll keep repeating the multi-pronged mantra till our dying days: communicate expectations to employees; encourage them to report wrongdoing; monitor, test and update ethics and compliance programs; and be sure to conduct credible, timely and thorough investigations when you suspect potential wrongdoings.

The world isn't ending, but the Dodd-Frank whistleblower provisions will certainly test the acumen of corporate America.

ACFE Regent Emeritus Bert F. Lacativo, CFE, CPA, a former FBI special agent, is a senior managing director at Mesirow Financial Consulting in Dallas, Texas. His views in this column aren't necessarily those of Mesirow Financial or its related entities.

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