1. CPA Code Implications Related to SEC Bounty Rules Kevin O’Brien kobrien@du.edu portfolio.du.edu/kobrien Daniels College of Business University of Denver

4. 5 th : Asadi/GE Energy or 2 nd Circuit Liu/Siemens Sean McKessy, Chief of the SEC’s Office of the Whistleblower, added, “This award of more than $30 million shows the international breadth of our whistleblower program as we effectively utilize valuable tips from anyone, anywhere to bring wrongdoers to justice. Whistleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws.”

5. FINREG WB Provisions Bounty (10 to 30% under False Claims Act) Right to a jury trial within 3 years – 90 day SARBOX rule does not apply – Exempting from SARBOX WB protection employees of subsidiaries does not apply Must be material – Greater than $1,000,000 in monetary sanctions arising from the WB information WB must have a “reasonable belief” that an SEC violation has occurred.

6. List of Exclusions Those who have a contractual or legal duty to report already Those who obtain the information by means or in a manner determined to violate federal or state criminal law Those in compliance, internal whistle blowing, internal audit personnel Those covered under the attorney client privilege unless disclosure the SEC is permitted under state rules.

7. SEC Bounty Rules & Preemption The SEC Says It’s OK to Reward People For Breaking State Laws The SEC stated in explanation of final regs:“we are not excluding information that is received in breach of state-law confidentiality requirements, such as those imposed on auditors, because to do so could inhibit important federal-law enforcement interests.”

8. Whistle Blower Improvement Act No contingent fee legal representation 0 to 30% (lowering minimum to 0) Can’t collect if culpable Must WB internally unless clear company is acting in bad faith.

9. Sec. 307: Outside Attorneys: “Up the Ladder Rule” Required to whistle blow inside the client company if a SEC violation To corporate counsel or CEO Then, to audit committee or Board of Directors ABA Rule: then may consider disclosing to SEC – Known as the “Noisy Withdrawal” rule.

10. Exceptions (b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary: – (1) to prevent reasonably certain death or substantial bodily harm; – (2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer's services; – (3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services.

11. Rest of States Permit Disclosure to SEC— Example Colorado Rule 1.13 Internal Lawyer: – If a lawyer for an organization knows that his employer’s officer or another employee is engaged in an illegal act that reasonably is likely to cause substantial injury to the company, then need to W/B internally to the highest sources within the company, unless – The attorney reasonably believes it is not in the best interest to the company to go internal, but rather external immediately whether or not Rule 1.6 allows for WB externally for fraud causing substantial financial harm to others.

12. Entity has Protection in Five States Five states don’t permit the lawyer to whistle blow to the SEC—only if the lawyer reasonably believes the client actions “will likely end in death or substantial bodily harm” – California – Alabama – Rhode Island – Kentucky – Missouri – Montana

13. Attorneys and WB Lawyers mostly cannot sue under the tort of wrongful discharge at the state level due to the attorney client privilege. However, the 9 th Circuit said the privilege does not apply federally. SOX said “any person” can sue for retaliation for Whistle Blowing Need only have a reasonable belief that shareholder fraud occurred.

14. Cynthia CooperColeen RawleySherron Watkins

15. CPA Duty of Confidentiality in Colorado cannot disclose or use for their own benefit any confidential information pertaining to a client or the employer of the CPA, which information is obtained in the course of employment or performing professional services.

16. 7.7B (exceptions to 7.7A) 1. Employer or client consents 2. Legally enforceable subpoena or summons or to comply with government regulations 3. Part of a civil suit between CPA and client or employer 4. Peer Review 5. Investigation by the board based upon a complaint

17. Old Rule—(1990’s) If employee CPA disagreed with management over GAAP treatment-- – Duty to quit – Duty to keep mouth shut

18. Sherron Watkins Guidance Texas Board Rule like all 50 states-- Don’t subordinate your judgment No whistle blowing provision similar to the ethical interpretation by the AICPA or Colorado Only 13 states have adopted the AICPA, PCAOB, Colorado WB rule

19. The Public Interest Principle In discharging their professional responsibilities, certificate holders may encounter conflicting pressures from among each of those groups. In resolving those conflicts, certificate holders should act with integrity, guided by the precept that when certificate holders fulfill their responsibility to the public, clients’ and employers’ interests are best served. (Emphasis added.)

20. Does new 7.3B or AICA Ethical Interpretation 1-102 satisfy DeGeorge requirements? – Permissible Severity of Harm Notification of Supervisor Exhaust Internal Channels – External WB Obligatory Documentation/ Evidence Chance of Success A material misrepresentation of the financial statement(s)? Supervisor Notification Exhaust Internal channels “Document facts/rules” Consider quitting Assess responsibility to WB externally

21. Last Step Most Controversial? 5. “The employee must have good reason to believe that by going public the necessary changes will be brought about. The chance of being successful must be worth the risk one takes and the danger to which one is exposed.”

22. Colorado/AICPA/PCAOB WB Rule CPAs “also must assess any responsibility that may exist to communicate to third parties, such as regulatory authorities or external auditor”

23. Rest of States Permit Disclosure to SEC— Example Colorado Rule 1.13 Internal Lawyer: – If a lawyer for an organization knows that his employer’s officer or another employee is engaged in an illegal act that reasonably is likely to cause substantial injury to the company, then need to W/B internally to the highest sources within the company, unless – The attorney reasonably believes it is not in the best interest to the company to go internal, but rather external immediately whether or not Rule 1.6 allows for WB externally for fraud causing substantial financial harm to others.

24. Public Policy Recommendations All states consider adopting the AICPA rules on DeGeorge like whistle blowing rules in the public interest. AICPA rules amended to allow whistle blowing directly to the SEC if: – the CPA reasonably believes it is not in the best interest to the company to go internal, or – the CPA reasonable believes the company is acting in bad faith.