Question

You are a young accounting staff member at Wackyo .com, a publicly traded company that recently had its Initial Public Offering. When the corporation recently “issued earnings guidance” for the upcoming quarter, you noticed that the company had assumed that sales would increase by 6%, and certain expenses would remain fixed costs. You were quite certain that these costs were variable, not fixed, but your supervisor told you to “fuggetta-bout it.” You plan to share your concerns with the SEC and do not intend to first go to the company’s Audit Committee. (please explain more with analysis as best you can).

a. Do you qualify as a whistleblower under the Dodd–Frank Act?

b. Do you qualify for protection against employer retaliation?

c. Did the company overstate or understate its earnings guidance?

d. If the company had understated its earnings guidance, would you have been equally likely to become a whistleblower?

Answer 1

a. Yes.

As per the Dodd-Frank Act, an eligible whistleblower is a person who voluntarily provides original information about a possible violation of federal securities laws that has occurred or is about to occur. One or more persons may be whistleblowers, companies or organizations cannot be. You may or may not be an employee in order to be a whistle blower.

In the given situation, you are an employee of Wackyo.com, and as an accounting staff member, are privy to original insider information about the details of financial guidance issued by the company. As the costs mentioned as fixed are actually variable costs, and would increase 6 % proportionately with 6 % increase in sales, the projected earnings should actually be lower than that as per the earnings guidance already issued. Therefore, the earnings guidance is actually a fraud on investors of the company, and is clearly a violation of the federal securities laws. Therefore, you plan to share this original information with the SEC and not the audit committee, as the latter must be well aware about the violation, but is probably hand and glove with the management of the company.

Therefore, you are qualified to be a whistleblower for the SEC.

b. Yes.

The whistleblower program prohibits retaliation by employers against employees who provide the SEC with information about securities violations.

c. The company overstated its earnings guidance by understating costs.

d. No.

If the company had been conservative, and had understated its earnings guidance, there would no fraud perpetrated on the investors, and resultantly no violation of security laws, and there would be no need for whistleblowing.