The Dodd-Frank Whistleblower Program: How Effective Is It?

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Under the Dodd-Frank whistleblower program, a whistle blower who helped SEC to stop a multi-million dollar fraud will receive about $50,000.    This is the first reward made under the Dodd-Frank whistleblower program for providing significant information to the SEC that expedited an investigation and prevented fraud.

The 2010 Dodd-Frank Act allows SEC to reward individuals who offer high-quality information that leads to the SEC enforcement action in which more than $1 million in sanctions is ordered.

“The whistleblower program is already becoming a success,” said SEC Chairman Mary L. Schapiro.   “We’re seeing high-quality tips that are saving our investigators substantial time and resources.”

However, that statement is arguable and begs to question the effectives of the Dodd-Frank whistleblower program.    Since the program was launched in August 2011, the SEC has reportedly received 8 tips a day.   And only one actual real substantial case with reward has been issued.    So, how effective is it?

Perhaps it will force SEC to investigate in depth and go beyond ordinary audits.    The next question is the agency’s effectiveness in combating fraud.     After all, the regulators were tipped off several times about Bernard Madoff ponzi scheme. 

To be effective, there must be quality investigation performed by auditors with industry knowledge and experience; otherwise, usually fraudsters are very cleaver in covering fraud.   Also, because of the massive amount of tips and lack of budget, the SEC might struggle to devote adequate attention to all the tips received and investigations will not be as effective.   And we’ll be back at square one.

Would the recently reported fraud have been discovered with quality audit without monetary award of the Dodd-Frank whistleblower program?      We’ll never know.

Practically, to get reward from the SEC three elements have to be present.   For these elements to be proven, the whistleblower has to be a high-level professional or someone very close to the person who is committing fraud (even personal assistants usually not involved in financial matters of the company).   In most cases, lower-level professionals are kept in the dark by fraudsters.  As the result, the high burden of prove potentially jeopardizes anonymity of the whistleblower.

In the end, the program could be a mere political marketing point, rather than real solution to the problem.    And one has to wonder whether paying whistleblowers introduces a moral hazard into an already tainted corporate culture, letting internal compliance go to waste (internal reporting is not required under the program) and keeping the companies in the dark about unethical behavior of its employees.     At the end, it all comes down to what SEC does with the information.

(Kyle Colona contributed to this article)

Anna Timone (195 Posts)

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