The voluntary submission of high-quality analysis by industry experts can be every
bit as valuable as first-hand knowledge of wrongdoing by company insiders.
Andrew Ceresney, SEC Director
On January 15, the U.S. Securities and Exchange Commission (SEC) announced its first whistleblower award to a company outsider—more than $700,000 to a non-employee industry expert who provided high-quality analysis that led to a successful SEC enforcement action (Heller, 2015; SEC, 2015).
The SEC’s whistleblower program has paid out $55 million to 23 whistleblowers since it began in 2011. Until now, those whistleblowers were company insiders—current or former employees. “Now companies will have a greater appreciation for the wider sources of original information on which the SEC may rely,” says attorney Steven Pearlman, as quoted in Heller’s article.
It is certainly important for companies to appreciate the breadth of information sources the SEC can and will rely on. However, it is just as important, if not even more important, for companies to consider the benefit to themselves of broadening their own sources of information about possible internal wrongdoing.
For example, well-run ethics hotlines are tremendous tools for encouraging internal reports of suspected ethical violations or other misconduct. They have proven to be highly effective at helping companies to reduce the time it takes to detect and respond to misconduct. In addition, they help to increase the recovery of fraudulent losses, and they have a positive effect on company reputation and employee morale.
The hotlines can be even more effective if relevant third parties—vendors, suppliers, and even key customers—also are encouraged to use the hotlines or other reporting mechanisms. These external stakeholders have different interactions with companies than employees do; they can see problems that employees might not.
In fact, according to the ACFE (Association of Certified Fraud Examiners), 51% of all tips come from non-employees, to include customers (22%), vendors (10%),“anonymous”, which may well include employees (15%), and others. “The fact that more than half of all tips involve parties other than confirmed employees,”says the ACFE in its 2014 Report to the Nations, “emphasizes the importance of cultivating tips from various sources.”
The SEC, says Andrew Ceresney, Director of the SEC’s Enforcement Division, will continue to take advantage of all forms of information and analysis received from whistleblowers, be they company insiders or outsiders, “to help better detect and prosecute federal securities law violations.” Shouldn’t companies give themselves the same opportunity to detect and deal with unethical or fraudulent behavior, regardless of source?
Ethical Advocate provides comprehensive ethics and compliance solutions, including ethics and compliance training and confidential and anonymous hotlines. Please contact us for additional information.
ACFE.Report to the Nations on Occupational Fraud and Abuse, 2014. http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf
Heller, Matthew. “SEC Issues Milestone Whistleblower Award,” CFO, January 18, 2016. http://ww2.cfo.com/regulation/2016/01/sec-issues-milestone-whistleblower-award/
U.S. Securities and Exchange Commission. “SEC Awards Whistleblower More than $700,000 for Detailed Analysis,” press release, January 15, 2016. http://www.sec.gov/news/pressrelease/2016-10.html