The work-from-home phenomenon has triggered a fresh frustration for U.S. corporations: Americans are blowing the whistle on their employers like never before.
The proof is in the data, with the U.S. Securities and Exchange Commission receiving 6,900 tips alleging white-collar malfeasance in the fiscal year that ended Sept. 30, a 31 percent jump from the previous 12-month record. Officials at the agency, which pays whistleblowers for information that leads to successful investigations, say the surge really started gaining traction in March when COVID-19 forced millions to relocate to their sofas from office cubicles.
Allan Koltin, CPA, CGMA, is the CEO of Koltin Consulting Group, a Chicago-based consulting firm that specializes in working with professional and financial services firms in the areas of practice growth, practice management, human capital, and mergers and acquisitions. A nationally recognized speaker and industry analyst, Allan has appeared on the CNN, WGN and Fox Television networks and has been quoted frequently in such media as the Wall Street Journal, New York Times, Washington Post, Chicago Tribune, Los Angeles Times, USA Today and New York Post, as well as Bloomberg News, BBC World Service, Business Week, Forbes and Reuters. He has also spoken nationally and internationally at hundreds of conferences including those held by the AICPA, international CPA associations and state CPA societies.For twelve consecutive years, Allan has been named by Accounting Today as one of the Top 100 Most Influential People in the accounting profession. Koltin was also voted one of the 10 Most Recommended Consultants, for the seventh straight year, in the “Annual Survey of Firms” conducted by INSIDE Public Accounting. In 2012, Allan was named by CPA Practice Advisor as one of the Top 25 Thought Leaders in the profession. He was one of the first inducted into the Accounting Marketing Hall of Fame by the Association for Accounting Marketing (AAM). He has also been a recipient of the NACVA Instructor of the Year Award and winner of the Journal of Accountancy Literacy Award. Previously he was recognized by the Illinois CPA Society with the Distinguished Service Award for outstanding service and commitment to the profession. Koltin is the author-editor of three books for professional services firms: CPA Firm Merger Strategies That Work, CPAs That Sell and the AICPA’s Marketing a Consulting Niche. He is a founding member of The Advisory Board, a think tank for the accounting profession, and has served on various advisory boards, including Outsource Partners International (OPI), the Association for Accounting Marketing (AAM), the National Association of Certified Valuation Analysts (NACVA) and H&R Block (HRB Business Services). Previously, Allan was the President and CEO of PDI, Global, Inc. which was the largest publisher of marketing newsletters for professional services firms. Allan originally sold PDI Global to H&R Block in 1998, buying it back in 2008, and then selling it again to Thomson Reuters in 2011. Prior to that, Allan was a Senior Partner in the Chicago-based accounting and consulting firm of FERS, where he served as the leader of the Investment Banking Group, as well as the Law Firm Consulting Group. At age 27, Allan had the distinction of being named the youngest partner in the history of the firm and was also a member of the firm’s Executive Committee. FERS was acquired by H&R Block in 1998. Allan attended both the University of Wisconsin – Madison and the University of Wisconsin – Milwaukee and received degrees in accounting and marketing. He lives in Chicago with his wife, Sharon, and his three children, Jack, Brian and Julia. His passion is facilitating retreats and providing coaching for firm leadership and partners. His specialties include strategy, governance, profitability, compensation, growth, human capital, and mergers and acquisitions.
Kate Risch Choi is a senior product manager for treasury and payment solutions at BMO Harris Bank.
Tom Hutton is managing partner for XL Innovate, the venture capital arm of XL Catlin. After working as a Consultant at McKinsey and Company, Tom served for ten years as the first CEO of Risk Management Solutions, a pioneer and global leader in providing risk modeling software, data and analytic services related to catastrophic risks to the insurance industry. His insurance career continued as CEO of White Mountains Re and board director of several insurance and reinsurance companies including XL Group, Safeco, Montpelier Re, Centre Cat, and Palomar Specialty.
In 2011, Tom founded New Energy Risk in partnership with XL Group. Tom served as CEO until the founding of XL Innovate in 2015, and currently serves as chairman. New Energy Risk addresses opportunities to apply insurance to support the development and financing of clean technology and renewable energy solutions and infrastructure, through an innovative form of insured technology performance.
Tom currently serves as a board director at several private and venture-backed companies including SoFi, a leading fintech company redefining consumer lending and financial services; Lemonade, a revolutionary personal lines insurance carrier; and Slice Labs, a provider of on-demand insurance in the sharing economy. Tom’s investments at XL Innovate also include Embroker, a tech driven commercial distribution company that is radically improving how mid-sized businesses buy and manage insurance coverage. Tom earned his BA in Economics and MS in Mechanical Engineering from Stanford University and his MBA from Harvard Business School. Tom is involved in several non-profit organizations with an emphasis on secondary school education and environmental issues. He recently served for several years as the President of Trustees at Phillips Exeter Academy, in New Hampshire.
The isolation that comes with being separated from a communal workplace has made many employees question how dedicated they are to their employers, according to lawyers for whistleblowers and academics. What’s more, people feel emboldened to speak out when managers and co-workers aren’t peering over their shoulders.
“You’re not being observed at the photocopy machine when you’re working from home,” said Jordan Thomas, a former SEC official who helped set up the agency’s whistleblower program a decade ago. “It’s never been easier to record a meeting when you can do it from your dining room table,” added Thomas, who now represents tipsters as an attorney at Labaton Sucharow in Washington.
Adam Waytz, a psychologist and professor at Northwestern University’s Kellogg School of Management, agrees.
“When you feel disconnected from work, you feel more comfortable speaking up,” said Waytz, who has studied the motivations of whistleblowers.
Massive award
Intended or not, the SEC itself has played a big role in encouraging informants to come forward by showing how lucrative whistleblowing can be. Since the pandemic hit the U.S., the agency has paid out some $330 million in awards, including an eye-popping $114 million to a single tipster in October. While the payments are tied to SEC investigations that almost certainly predate coronavirus, the amount of money going out the door is unprecedented in the decade since the regulator started its whistleblower program.
For corporations, the rise in tips risks triggering a consequence from work from home that will last long after employees return to the office. Even if few of the tips lead to SEC enforcement cases, companies could still be dealing with years of compliance distractions as the agency launches investigations, subpoenas documents and grills senior executives.
“Corporations and their lawyers are acutely aware of the fact that tips are flooding in and that whistleblower awards have ballooned,” said Joseph Grundfest, a former SEC commissioner who’s now a law professor at Stanford University. “You pay whistleblowers more than $100 million, you’re going to get more whistleblowers.”
The SEC gained authority to pay whistleblowers as part of the 2010 Dodd-Frank Act after lawmakers assailed the agency for missing signs of corporate wrongdoing that were later found to have laid the groundwork for the 2008 financial crisis. Another massive black eye was the regulator’s failure to catch Bernard Madoff’s Ponzi scheme despite repeated warnings from whistleblower Harry Markopolos.
Under the program, tipsters can receive financial awards if they voluntarily provide unique information that results in an enforcement action. Payouts can range from 10 percent to 30 percent of the money collected in cases where sanctions exceed $1 million. Awards are paid from a fund set up by Congress — not money owed to harmed investors.
Leveraging whistleblowers has become one of the SEC’s most potent tools for rooting out financial crime, despite the fact that most of the tips the SEC receives don’t lead to enforcement cases. Information has come from more than 100 countries, with whistleblowers providing evidence such as texts, emails and recorded calls.
Altered voices
The SEC never discloses the names of whistleblowers and what cases were brought with their help. Agency officials sometimes don’t even know the identity of tipsters. Thomas, the whistleblower attorney, has gone so far as to use voice-changing technology to disguise clients’ genders on conference calls with the SEC.
About $737 million has been paid to 133 individuals since the SEC issued its first payment in 2012, with most tipsters waiting months or even years after the agency wraps up its investigations to get their awards. Part of the reason payouts have quickened recently is that the SEC has streamlined its process so that enforcement lawyers who work with tipsters can actively vouch for how crucial their help was.
Discussing the dramatic jumps in tips since the start of the pandemic, then SEC Enforcement Director Stephanie Avakian said Dec. 3 that it’s too soon to assess the quality of the information the agency is receiving. She credited the huge awards that the SEC paid out last year as an important factor in encouraging whistle-blowing.
“Making more awards — certainly larger awards — all those things do go toward incentivizing whistle-blowers to come forward,” Avakian, who left the SEC last month, said at an event hosted by the American Conference Institute.
Overwhelmed regulators
Grundfest, the Stanford Law professor, just hopes the SEC doesn’t get overwhelmed.
“The problem is that they’re being flooded with tips and don’t have a robust mechanism for separating the wheat from the chaff,” he said.
In recent months, the SEC has received reports on possible financial-disclosure violations and the mismarking of assets. The coronavirus’ impact on businesses has also triggered allegations of wrongdoing, as companies have a responsibility under SEC rules to be truthful about how the pandemic is affecting their bottom lines.
“It’s very convenient for management to blame COVID for underperformance,” said Howard Schilit, author of “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports.” “It becomes an alibi for a company’s problems.”
— With assistance from Tom Schoenberg