Understanding the Surge in Whistleblower Reports
The SEC's Office of the Whistleblower received 18,354 reports in FY2023, marking a 49% increase from the previous year. Concurrently, internal reporting through corporate hotlines also reached new heights, with over 1.72 million reports filed. However, median internal reporting rates for accounting issues fell from 4.7% in FY2021 to 4.3% in FY2023.
These trends present a challenge for compliance teams: while employees are increasingly vocal, financial misconduct often bypasses internal channels. The following questions arise from discussions with governance, risk, and compliance leaders striving to balance transparency about external reporting options with maintaining trust in internal mechanisms.
Q1: Are We Required to Inform Employees About Direct Reporting to the SEC?
You're not obligated to promote the SEC whistleblower program, but you must not obstruct it. Rule 21F-17 prohibits actions that prevent employees from communicating directly with the Commission about potential securities law violations.
The SEC enforces this rule rigorously. Recent cases in the FY2023 report include companies penalized for requiring departing employees to notify the organization before filing external complaints or making severance payments conditional on certifying no complaint had been filed. Ensure your employment contracts, severance agreements, and ethics policies do not impede external reporting. Have legal counsel review these documents annually, focusing on confidentiality obligations and dispute resolution procedures.
Q2: Can Employees Receive an SEC Award After Reporting Internally?
Yes. Internal reporting doesn't disqualify an employee from receiving an SEC whistleblower award. In 2021, over 75% of SEC tips came from individuals who first raised concerns internally.
This creates a challenge for organizations. An employee can report internally, assess your response, and escalate to the SEC if dissatisfied with the investigation's timeline, outcome, or communication. The SEC award calculation doesn't penalize them for using internal channels first.
The implication is clear: your investigation and response protocols are crucial. Delayed responses or perceived inaction can turn an internal report into an external one. Establish defined response timelines, transparent case tracking, and documented outcomes to show you take concerns seriously.
Q3: How Do We Compete with Large SEC Awards?
You can't compete directly with extreme awards like the $279 million payout, which is an outlier. Since 2012, the SEC has received 82,775 tips but awarded only 397 individuals, a hit rate of about 0.5%.
Instead, offer certainty, speed, and protection. Internal reporters receive a defined process, regular updates, and immediate anti-retaliation protections. In contrast, SEC reporters face a lengthy process with no guaranteed outcome or direct case status communication.
Highlight these internal program advantages: "Report here and receive a response within two business days, with status updates every two weeks. You're protected under our non-retaliation policy from the moment you file." These are tangible benefits that an SEC tip can't provide.
Q4: Why Are Internal Accounting Reports Declining While SEC Tips Increase?
This discrepancy should concern you. Median internal reporting rates for accounting issues fell to 4.3% in FY2023, even as overall internal reporting rose and SEC tips hit record levels.
Several factors might explain this gap. Employees may see financial misconduct as serious and suitable for external reporting. They might doubt internal compliance teams' authority over finance leadership. Or your system might not clearly communicate that accounting concerns are welcome and will be escalated appropriately.
Review your intake form to ensure it explicitly lists accounting and financial reporting as categories. Ensure employees know these reports go directly to your audit committee. Consider whether your investigation process for financial concerns includes sufficient independence, such as involving external counsel or forensic accountants.
Q5: Can We Encourage Internal Reporting Before External Reporting?
You can encourage it, but you can't require it or penalize employees for bypassing internal channels. Your employee handbook can state a preference for internal reporting and explain the benefits, like faster resolution and direct communication. Train managers to emphasize these benefits, but don't make internal reporting a prerequisite for job security or other benefits.
Your communications should focus on what employees gain by reporting internally, not what they risk by reporting externally. Good: "Our internal hotline gives you direct access to the audit committee and guarantees a response within 48 hours." Avoid language that discourages external reporting, as it poses a compliance risk.
Q6: What Should We Review in Our Separation Agreements?
Review every separation agreement, severance package, and exit document for Rule 21F-17 compliance. The SEC has challenged agreements containing:
- Requirements for departing employees to notify the company before filing complaints with government agencies
- Confidentiality provisions that could be interpreted as prohibiting information sharing with regulators
- Conditions on severance pay requiring certification that no complaint has been filed
- Waivers of rights to monetary awards from government whistleblower programs
Even if your agreement includes a carve-out for government reporting, contradictory language elsewhere can create exposure. The SEC examines the entire agreement to determine if a reasonable employee would feel free to report externally without consequence.
Next Steps for Your Organization
Review the SEC's annual Office of the Whistleblower Report for enforcement priorities and case examples. Audit your employment agreements, separation templates, and ethics policies against Rule 21F-17. If internal reporting rates for accounting issues are declining, conduct focus groups or surveys to understand why employees lack trust in that channel for financial concerns. The gap between internal and external reporting won't close on its own.
