AC504 Unit 7 Whistleblowing Case Study Example

One Hundred Thirty Days After the Hotline: A Unit 7 Whistleblowing Case Study at a Listed Kitchen-Equipment Maker

[Student Name]

Purdue University Global

AC504: Ethical Issues in Business and Accounting

Unit 7 Whistleblowing Case Study

[Instructor Name]

[Date]

The company, its officers, the assistant controller and every figure are composite; the statutes, rule, case and textbook cited are real; this is coursework analysis, not legal advice.

Chronology

At the end of the first quarter, $6.8 million of commercial ovens and refrigeration units were invoiced to eleven dealers and moved by truck to a leased overflow warehouse forty miles from the plant. The assistant controller noticed that none of the dealers had sent purchase orders and that the warehouse lease was in the company's name. In March she raised it with the chief financial officer, who said the dealers had agreed verbally to take the goods next quarter. In April she filed a written report through the company's hotline, addressed to the audit committee chair, attaching the invoices, the shipping records and the lease. She received a one-line acknowledgment. At the end of the second quarter, $7.4 million of equipment went to the same warehouse on the same kind of invoices. It is now 130 days since her written report.

What the Conduct Is

Revenue is recognized when control of goods passes to a customer. Equipment invoiced to dealers who did not order it and shipped to a warehouse the company itself leases has not passed to anyone. If the dealers have not agreed to buy, there is no contract; if they have, the arrangement would have to meet strict conditions for revenue before delivery, which a company-leased warehouse and verbal agreements cannot. On these facts, the company has recorded about $14.2 million of revenue that did not occur (Mintz & Morris, 2020).

Her Duties

As a CPA in business, she must not be associated with information she knows is materially false, and she has already done what the profession expects first: raise the matter with her supervisor, then go higher (American Institute of Certified Public Accountants, 2014). Internal reporting has now failed twice. The audit committee has had four months and the conduct has repeated. Staying silent now would mean preparing quarterly numbers she knows are false.

She should also consider resigning if the company will not correct the statements, since continuing to prepare them could make her part of the misstatement. Resignation, though, does not end her ability to report, and the law gives her a path that protects her if she stays.

What the Law Protects

Three provisions matter, and each is narrower than people assume.

Sarbanes-Oxley. Employees of public companies who provide information about conduct they reasonably believe is securities fraud to a supervisor, to federal authorities or to Congress are protected from retaliation (Civil action to protect against retaliation in fraud cases, 18 U.S.C. § 1514A, 2018). Her internal reports already qualify. Any retaliation claim under this law goes first to the Labor Department, and the deadline is 180 days after the retaliatory act.

Dodd-Frank. Under the SEC's whistleblower program, an eligible tipster's award is set at 10 to 30 percent of what the SEC collects, once sanctions pass $1 million to individuals who give the SEC original information that leads to a successful enforcement action (Securities whistleblower incentives and protection, 15 U.S.C. § 78u-6, 2018). Its anti-retaliation provision, however, protects only those who have reported to the SEC itself; the Supreme Court held that internal reporting alone is not enough (Digital Realty Trust, Inc. v. Somers, 2018).

The 120-day rule. People whose jobs involve accounting or internal controls are usually excluded from awards for information learned in that role. One exception applies when at least 120 days have passed since they reported the matter to the audit committee, chief legal officer or chief compliance officer, or to their supervisor, with the audit committee informed. She reported in writing 130 days ago. She is now eligible.

The 130 days matter because the law deliberately gives companies 120 days to fix what an insider reports, and once a company lets that window pass while the conduct continues, it has chosen to let her take the matter outside.

What She Should Do

She should first write once more to the audit committee chair, stating that the conduct repeated in the second quarter and that she believes the statements are materially misstated. That letter costs nothing and gives the committee one more chance. She should then consult an employment lawyer of her own, not the company's, and file a tip with the SEC through its online system, including the documents she lawfully holds as part of her job. Company agreements cannot stop her: SEC rules bar any person from taking action to impede an individual from communicating directly with the Commission about a possible securities law violation. She should keep copies of her reports and the acknowledgment, which establish the dates the law relies on.

She should not take documents she has no right to access, and she should not speak to the press, which receives no protection under these provisions.

What the Company Should Have Done

The audit committee's silence is itself part of the case. A committee that receives a documented report of possible revenue fraud should engage outside counsel, commission an independent investigation and inform the external auditor, who has its own obligations under federal securities law when it learns of possible illegal acts. A one-line acknowledgment followed by four months of nothing suggests either that the committee did not understand what it was given or that someone with influence over it preferred not to look. Either way, the assistant controller cannot fix the committee. What she can do is make sure the information reaches someone with the power and the duty to act, and the law now gives her that path.

There is also a practical point. If the company's statements are later restated, investors who bought shares during the two quarters will have claims, and the people who prepared the statements will be asked what they knew. Her written reports will show that she knew and acted. Silence would show that she knew and did not.

The Personal Cost

None of this is free for her. Even with legal protection, whistleblowers often find their working lives harder, and a retaliation claim takes years. She should plan for the possibility of leaving, keep her own records of her performance reviews, and decide in advance what she will do if the company asks her to sign the next quarter's certification packages.

The Ethical Weight

Whistleblowing is often framed as disloyalty. Here, she has been loyal in the way that matters: she gave the company two chances, in the order the profession recommends, before going outside. The people she owes something to now include the investors who are buying shares on the strength of numbers she helps prepare.

References

American Institute of Certified Public Accountants. (2014). AICPA code of professional conduct. AICPA.

Civil action to protect against retaliation in fraud cases, 18 U.S.C. § 1514A (2018).

Digital Realty Trust, Inc. v. Somers, 583 U.S. 149 (2018).

Mintz, S. M., & Morris, R. E. (2020). Ethical obligations and decision making in accounting: Text and cases (5th ed.). McGraw Hill.

Securities whistleblower incentives and protection, 15 U.S.C. § 78u-6 (2018).