5 Things Whistleblowers Should Know About Reporting Accounting Fraud to the SEC
As an SEC whistleblower law firm dedicated to fighting accounting fraud, we understand the importance of properly reporting misconduct that misleads the investors while protecting the individuals who come forward, potentially anonymously. The SEC Whistleblower Program offers robust incentives and safeguards to encourage whistleblowers to expose fraudulent activities. In this SEC whistleblower guide on accounting fraud, we will explore five essential insights that whistleblowers should know about reporting accounting fraud to the SEC. From understanding program benefits and anonymity to eligibility criteria, program rules, and potential monetary awards.
Incentivizing Reporting of Accounting Fraud
The SEC Whistleblower Program plays a critical role in uncovering accounting fraud and safeguarding investors. By encouraging individuals with knowledge of fraudulent activities to come forward, the program promotes transparency and integrity in the financial system. Moreover, whistleblowers who report accounting fraud may become eligible for significant monetary awards of up to 30% of the recover as an SEC whistleblower reward and in recent years hundreds of millions of dollars have gone to whistleblowers which incentivizes reporting by allowing them to earn a percentage of the monetary sanctions collected in successful enforcement actions. There are many different types of accounting schemes to look out for, including, but not limited to:
Inadequate Internal Controls Over Financial Reporting (ICFR)
Companies must maintain adequate internal controls over financial reporting to ensure accurate recording and preparation of financial statements. Part of the controls include maintaining a sufficiently detailed audit trail for a company or regulatory agency to determine what happened and why. Destruction of the audit trail is sufficient grounds for the SEC to take action against a company.
Sometimes, this is hand and hand with other SEC violations, such as stock pumping, but if the company is recognizing fictitious revenue and inflating earnings by recording revenue from fake contacts or nonexistent sales. Sometimes, this may be falsely justified by booking profits for contracts and funds that haven’t been realized yet, and the future profits/contracts may or may not ever manifest.
Timing Schemes of Revenue Recognition
Improper timing of revenue recognition occurs when a company improperly shifts revenue from one period to another. Companies may accelerate revenue recognition to meet earnings targets or delay recognizing revenue to maintain revenue guidance.
Misleading Forecasts or Projections
Misleading forecasts involve avoiding disclosure of known increased risks in financial projections or downplaying likely events that are internally projected to have a significant impact. The lack of harmony between inside projections and outside projections are a symptom there may be a deeper securities problem.
Other Improper Expense Recognition Schemes
Companies may employ various expense recognition schemes to overstate net income, such as eliminating or deferring expenses, allocating more costs to inventory than cost of goods sold, creating excess reserves, understating reserves for bad debt, and failing to record asset impairments. Many companies engage in some complications that may or may not be legitimate. Deferments that kick the can down the road and then forget about the kick or change the circumstances later may be problematic.
Not Following GAAP
GAAP stands for Generally Accepted Accounting Principles which refers to a set of standard accounting principles, procedures, and guidelines to prepare and present financial statements. GAAP provides a framework for consistent and reliable financial reporting, ensuring that financial statements are prepared in a uniform and understandable manner. If the accounting deviates from GAAP, there must be a well grounded basis that makes objective sense, not just a relativist hope that someone will buy into a non-accepted practice.
Anonymously Report Accounting Fraud to the SEC and Potentially Earn Awards
Maintaining confidentiality is vital for the SEC to keep a pipeline of whistleblowers who fear retaliation and may be extremely well placed and would not come forward with the critical information but for the anonymity provisions. The SEC Whistleblower Program allows individuals to report accounting fraud anonymously through experienced SEC whistleblower attorneys. Anonymity is not necessarily guaranteed from start to finish, however, one would be hard pressed to show an example under the SEC program in which it didn’t work.
Most Employees, Including Officers and Directors, Can Be Eligible for Whistleblowers Rewards
Accounting fraud can occur at all levels of an organization, including among officers, directors, and employees with high-level access. The SEC Whistleblower Program recognizes this and does not limit eligibility based on an individual’s position within a company. Whistleblowers who possess valuable information about accounting fraud, regardless of their role, can potentially qualify for monetary awards.
Understanding the SEC Whistleblower Program’s Rules Before Filing a Tip
Before reporting accounting fraud to the SEC, whistleblowers must familiarize themselves with the program’s rules and requirements. Consulting with experienced SEC whistleblower attorneys can help ensure compliance and increase the likelihood of a successful submission. Key aspects to understand include the eligibility criteria, the type of information required, the process for submitting a tip, and the protection provided under the program.
Accounting Fraud Whistleblower Award
Whistleblowers who report accounting fraud that leads to successful SEC enforcement actions may qualify for monetary awards. These awards range from 10% to 30% of the monetary sanctions collected by the SEC. The percentage is determined based on various factors, including the value of the information provided, the extent of assistance provided to the SEC, and the significance of the reported fraud. The SEC Whistleblower Program recognizes the essential role whistleblowers play in exposing accounting fraud and rewards them accordingly.
Reporting accounting fraud the right way to the SEC is a vital step towards protecting investors and maintaining the integrity of the financial system. If you possess information about accounting fraud, consult with an experienced SEC whistleblower law firm to protect your rights and play a crucial role in holding corporations accountable while potentially receiving a healthy SEC whistleblower award.