Today the House passed the PCAOB Whistleblower Protection Act of 2019 (PCAOB WPA) by voice vote.  If enacted into law, the PCAOB WPA would establish a whistleblower reward program at the PCAOB similar to the SEC whistleblower program and would protect whistleblowers against retaliation for disclosing violations of PCAOB rules or federal securities laws, including the Sarbanes Oxley Act.

PCAOB Whistleblower Reward Program

The PCAOB WPA establishes a whistleblower reward program under which eligible whistleblowers would receive between 10 percent to 30 percent of the fines collected from a PCAOB disciplinary proceeding if the total monetary sanctions exceed $250,000.  Establishing a whistleblower program at the PCAOB should incentivize whistleblowers to come forward  when they suspect violations of PCAOB rules (standards governing audits of public companies), the Sarbanes-Oxley Act, or SEC rules. The SEC whistleblower program has been successful in protecting investors and combating fraud.  Since the inception of the program, enforcement actions from whistleblower disclosures have generated more than $2 billion in financial remedies.

The PCAOB is the principal regulator overseeing accounting firms that audit public companies and SEC-registered brokers and dealers, and is authorized to take disciplinary action against audit firms for violations of PCAOB rules. As investors rely on the audited financial statements of public companies, it is critical to ensure that the audits are reliable.  The PCAOB, however, has been fairly ineffective in policing the audit firms.  A recent Project on Government Oversight report titled How an Agency You’ve Never Heard of Is Leaving the Economy at Risk found that “when it comes to some of the biggest firms under its jurisdiction, [the PCAOB] has taken disciplinary action over only a tiny fraction of the apparent violations its staff has identified. Meanwhile, the financial penalties it has imposed pale into insignificance compared to the fines it apparently could have imposed.”  POGO’s investigation also found that PCAOB inspection reports identified at least 808 instances of defective auditing but brought only 18 enforcement cases, and that PCAOB could have fined the Big Four audit firms $1.6 billion, but has fined these firms just $6.5 million.

In addition, several recent scandals in the audit industry reveal a troubling lack of ethics that could taint the critical work that audit firms perform in ensuring the accuracy of public company financial reporting.  This includes KPMG altering past audit work after receiving stolen information about inspections that would be conducted by the PCAOB and KPMG auditors cheating on internal exams.

Whistleblower Protection for Disclosures About Potential Violations of Audit Regulations and Federal Securities Laws

The PCAOB WPA includes a strong whistleblower protection provision that prohibits employers from retaliating against employees who report potential violations of public company accounting laws or regulations or potential violations of federal securities laws to the PCAOB or their employers.  In particular, protected whistleblowing includes:

• providing information to the PCAOB whistleblower program or initiating, testifying in, or assisting in any investigation or administrative action of the PCAOB based upon or related to such information;

• making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002, the Securities Exchange Act of 1934, section 1513(e) of title 18, United States Code, and any other law, rule, or regulation subject to the jurisdiction of the SEC; and

• providing information regarding any conduct that the whistleblower reasonably believes constitutes a violation of any law, rule, or regulation subject to the jurisdiction of the PCAOB to-

  • a person with supervisory authority over the whistleblower at the whistleblower’s employer, where such employer is an entity registered with or required to be registered with the Commission, a self-regulatory organization, or a State securities commission or office performing like functions; or

  • such other person working for the employer who has the authority to investigate, discover, or terminate misconduct.

Similar to the Dodd-Frank whistleblower protection provision, PCAOB whistleblower claims can be brought directly in federal court.  A prevailing whistleblower is entitled to make-whole relief, including:

• reinstatement with the same seniority status that the whistleblower would have had, but for the discrimination;

• 2 times the amount of back pay otherwise owed to the whistleblower, with interest; and

• compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.

Hopefully the Senate will act promptly to enact the PCAOB WPA.