House approves PCAOB whistleblower program

H.R. 3625 will “ensure that the PCAOB functions properly and protects consumers and workers from bad actors that could jeopardize the future stability of our public markets,” Garcia said in a statement issued following the approval of the bill by the House.

Whistleblowers could get up to 30 percent of fines collected from a disciplinary proceeding if the total fines are greater than $250,000, according to the Congressional Budget Office. The measure also would prohibit employers from retaliating against employees who report potential violations of public company accounting laws or regulations to their supervisors or to the oversight board.

Supporters of this bill include the National Whistleblower Center, the Institute of Internal Auditors, and Public Citizen, Garcia said during House consideration.

Modeled after the SEC

The proposed PCAOB whistleblower program “is similar to the program that was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act for the Securities and Exchange Commission,” Rep. Maxine Waters (D-Calif.) said during discussion of the bill. Calling the SEC whistleblower program “extremely successful,” Waters reported 62 whistleblowers have been awarded some $381 million under that program.

Given the board’s “critical mission to protect investors and further the public interest by ensuring informative, accurate, and independent audit reports of public companies and SEC-registered brokers and dealers, it is vital that PCAOB whistleblowers are incentivized to come forward and are protected from employer retaliation,” Waters said.

The Congressional Budget Office estimates the costs of compliance with the mandate expanding federal protection of whistleblowers, should it ultimately become law, would be small.

A duplicative program?

Some see the parallelism with the already existing SEC whistleblower program as an indicator the world does not exactly need another one. In a Sept. 17 letter to House members, Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce, maintained the bill’s passage would be duplicative. The 2002 Sarbanes-Oxley Act and 2012 Dodd-Frank Act already established whistleblower protection programs for “those who report on wrongdoing at publicly traded companies,” Bradley wrote.

It is a point that did not escape the attention of Rep. William Huizenga (R-Mich.). “Why is a program at the PCAOB even necessary in light of the Securities and Exchange Commission’s already well-established whistleblower program?” he asked during the discussion. Supporters of the measure should “explain why they believe that auditors, who play such a critical gatekeeping function in our capital markets, should be potentially offered the prospect of monetary bounties at the expense of disrupting the effective functioning of the audit process as it is today,” Huizenga said.

Calling the bill “redundant and ill-conceived,” Huizenga maintained it amounts to little more than a lawyers’ relief act. The measure “likely has one purpose,” he said: “to provide another avenue for [the] plaintiffs’ bar to enrich itself.”

During House consideration of the bill, Rep. Patrick McHenry (R-N.C.) noted that, if passed, the measure would require PCAOB coordination with the SEC whistleblower office.

Some significant omissions?

The PCAOB whistleblower program as currently envisioned in the House legislation may pose some dilemmas for accountants if it ultimately becomes law. “The bill is at odds with established principles of confidentiality that exist within the auditing profession,” Huizenga said.

“State laws and professional standards require accounting professionals to maintain the confidentiality of client information received in the course of performing an audit,” Huizenga explained. H.R. 3652 “purports to exclude from whistleblower status any person who gains the information while performing audit work,” he continued. The problem is, though, that “the exclusion is muddled by an unclear and potentially broad exception,” Huizenga said. “As a result, it is very possible that personnel performing audits may try to garner bounties by blowing the whistle on their audit clients, contrary to their professional obligations,” he noted.

In addition, a whistleblower who happens to be a little bit culpable may actually be shielded from punishment if the bill as passed becomes law. Significantly, Bradley noted in the Chamber’s letter to representatives, the bill lacks a “no amnesty clause” that would make sure “that a culpable individual would not automatically become exempt from an enforcement action if they report wrongdoing through the whistleblower program,” Bradley wrote.

As of this writing, a companion bill had not been introduced in the Senate. Earlier this year, Sen. Jack Reed (D-R.I.) introduced S. 1256, which would promote transparency by allowing PCAOB disciplinary proceedings to be open to the public.

Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues