It's been nearly a decade since the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the SEC's whistleblower program-giving awards directly to individuals who voluntarily submit information on violations.
But has the SEC program received many tips and paid out big rewards since then? How effectively have companies responded to the pressure to encourage internal reporting-and where should boards focus their efforts in the future?
In this episode, Matt Shelhorse, a partner with PwC's Forensic Services Practice, discusses the state of whistleblower programs today and how boards should assess the effectiveness of their own whistleblower initiatives.
With 69% of reports coming from company insiders-current or former employees-Kerstetter noted concern that whistleblowers might have more incentive to take their issues directly to the SEC, rather than report potential violations internally within their own organizations. When this happens, according to Shelhorse, companies miss out.
''When there is a program, companies may be focused more on the process and the tools,'' he explained. ''How do we intake these allegations? How do we process these allegations?'' He cited conversations with audit committees about the types of information they're getting and how it's formatted.
According to Shelhorse, this view needs to expand to make sure boards see the right information so they can make decisions and become comfortable with how their whistleblower program is operating.
''We're really missing an opportunity to optimize the information that's available-the trends, the challenges, the growth opportunities,'' he said. ''There's a chance for companies to look further in this information source and optimize what they're doing with it.''
''Living in a complex global world that's fast-paced with a lot of moving parts, it's not realistic for a company to think they're not going to have a crisis,'' he said. ''I think the trick is managing that crisis as best you can so you can emerge stronger from it.''
Importantly, a company and its board must make sure there's no form of retaliation with a whistleblower program.
''This gets back to people being comfortable coming forward and reporting sensitive matters,'' Shelhorse said. When something happens, a playbook is handy to determine what is the protocol in place, how do we follow that protocol, and who's responsible for it?
Shelhorse added that issues and responses in a whistleblower program tend to be siloed. ''So there may be a tendency to say this is a legal issue, this is a compliance issue, when in reality it's a multidimensional issue involving folks from HR, finance, and operations.''
Look at the information that comes into your hotline for repeat issues and findings, which might reveal potentially ineffective areas of the program. These themes and trends can be plumbed for root causes and areas for education and improvement.
''Create a learning environment so the program is self-fulfilling,'' he said. ''You have an issue, you investigate that issue, and you learn from that issue-this could be through a series of trainings that come out of it-so you're better for it moving forward.''
But has the SEC program received many tips and paid out big rewards since then? How effectively have companies responded to the pressure to encourage internal reporting-and where should boards focus their efforts in the future?
In this episode, Matt Shelhorse, a partner with PwC's Forensic Services Practice, discusses the state of whistleblower programs today and how boards should assess the effectiveness of their own whistleblower initiatives.
2018 was a record year [for the SEC's whistleblower program]. It had the highest number of awards-more in 2018 than in all the other years combined. - Matt Shelhorse, partner, PwC's Forensic Services Practice
What Happens After the Whistle Is Blown?
The SEC whistleblower program is alive and well, Shelhorse said. In 2018 alone, it paid out over $170 million, and its hotline received over 5,000 tips-14 per day-for reports on insider trading, self-dealing, and FCPA violations. Roughly 67% of reports led to a new investigation. The SEC is looking to enhance and amend the whistleblower program and make it broader from an awards perspective.With 69% of reports coming from company insiders-current or former employees-Kerstetter noted concern that whistleblowers might have more incentive to take their issues directly to the SEC, rather than report potential violations internally within their own organizations. When this happens, according to Shelhorse, companies miss out.
''When there is a program, companies may be focused more on the process and the tools,'' he explained. ''How do we intake these allegations? How do we process these allegations?'' He cited conversations with audit committees about the types of information they're getting and how it's formatted.
According to Shelhorse, this view needs to expand to make sure boards see the right information so they can make decisions and become comfortable with how their whistleblower program is operating.
''We're really missing an opportunity to optimize the information that's available-the trends, the challenges, the growth opportunities,'' he said. ''There's a chance for companies to look further in this information source and optimize what they're doing with it.''
Steps for Improving Whistleblower Programs
First, Shelhorse recommended a shift in perspective around compliance, hotlines, and allegations. Hotlines and reports need to be seen as valuable sources of information rather than areas where silence equals success.''Living in a complex global world that's fast-paced with a lot of moving parts, it's not realistic for a company to think they're not going to have a crisis,'' he said. ''I think the trick is managing that crisis as best you can so you can emerge stronger from it.''
I think from management and boards of directors, what I've heard often, having no reports to the hotline is a good thing. In reality, it might not be. - Matt Shelhorse, partner, PwC's Forensic Services PracticeMake sure the culture of the company fosters open communication. Encourage trust and transparency so people feel comfortable using the hotline and raising allegations. Also vital: People need to feel like there will be a response to the hotline-that a violation will result in consequences. He advised that boards work with management to make sure these things are being done. ''Then you can take a little more comfort in this process,'' he said.
Importantly, a company and its board must make sure there's no form of retaliation with a whistleblower program.
''This gets back to people being comfortable coming forward and reporting sensitive matters,'' Shelhorse said. When something happens, a playbook is handy to determine what is the protocol in place, how do we follow that protocol, and who's responsible for it?
Shelhorse added that issues and responses in a whistleblower program tend to be siloed. ''So there may be a tendency to say this is a legal issue, this is a compliance issue, when in reality it's a multidimensional issue involving folks from HR, finance, and operations.''
Look at the information that comes into your hotline for repeat issues and findings, which might reveal potentially ineffective areas of the program. These themes and trends can be plumbed for root causes and areas for education and improvement.
''Create a learning environment so the program is self-fulfilling,'' he said. ''You have an issue, you investigate that issue, and you learn from that issue-this could be through a series of trainings that come out of it-so you're better for it moving forward.''
