White collar criminals cause more economic harm than armed robbers, drug dealers, car thieves and other miscreants put together. In total, they steal approximately five percent of business revenues annually, dwarfing the losses due to violent crime.
In theory, the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law last July, was designed to weed out that corruption, in part by offering new protections and incentives to whistleblowers.
Last week, the New York State Society of CPAs convened a panel of experts to discuss whether, in fact, Dodd-Frank will work. Would the new law give whistleblowers enough courage and protection to go out on a limb and confide their concerns to the SEC and other bodies? That was the question before Enron whistleblower Sherron Watkins, PCAOB enforcement deputy director Marion E. Koenigs, and former SEC Commissioner Paul S. Atkins.
"No way," was essentially what Sherron Watkins said. Watkins, you'll remember, had uncovered accounting fraud at Enron and subsequently helped the Department of Justice understand the labyrinthine complexity of the 6th largest corporation in America. Unlike most CPAs, she knows what it actually feels like to be a whistleblower, not in theory but in practice. And what she sees in Dodd-Frank doesn't begin to address how fraud happens or how hard it is to get action.
Law Ignores the Small Frauds that Lead to Big Frauds
"There's a saying," said Watkins. "Serial killers start with cats." In other words, fraud starts with small things, not gross billion dollar malfeasance but with bending the rules, cutting corners. One reason it may persist for so long is because no single issue is big enough for anybody to stop it. Instead, standards start to drop, rigor declines and employees get the message that no one knows or cares. But Dodd-Frank's stipulation that, to gain any kind of reward, the whistleblower's actions must result in penalties worth at least a million dollars means that the small, early frauds don't warrant any kind of action. But the longer the fraud goes on, the worse it gets.
"I needed," said Watkins, "to be able to talk to the SEC about Enron in 1996. But under these provisions, I don't think I would have. But that's when we might have been able to stop things in their tracks!"
Whistleblowers Aren't Encouraged to Come Forward
If you try to fix the problem internally, fraudulent bosses won't tell you to stop; they're cannier than that. "When Cynthia Cooper started pulling at the thread that eventually unwound WorldCom," Watkins recalled, "her boss didn't tell her to stop. He said: here are my top five priorities and I need you to concentrate on those."
What that means is that, by the time the scale of abuse is gross enough to be worth the extremely traumatic experience of whistleblowing, the employees who know about it will be extremely frustrated, even paranoid. They may even come across as a little mad. (Certainly this problem dogged Harry Markopolos as he tried, again and again, to alert the SEC to Madoff.) At this stage, they desperately need a lot of love, protection and advice - not something Dodd-Frank is set up to provide. The legislation simply does not take into account how extremely dangerous and frightening the experience of whistleblowing is. Moreover, by the time the whistleblower is prepared to act, it is usually too late; the company can't be saved.
"It is far more lucrative and safe, still, to stay quiet," said Watkins. "The reality is that, after you're known as a whistleblower, it is very hard to resume your professional career. You may have proved your high standards of ethics but most people will label you a troublemaker for evermore." Nothing in Dodd-Frank, she argued, makes up for the sheer cost incurred when you tell the truth.
SEC worries about overwork
But SEC insiders worry the legislation has already gone too far. Unapologetic about its performance in the past, former SEC commissioner Paul S. Atkins worried about what he called the "crackpots" constantly providing tips - people with a grudge against a company or a personal vendetta. "The challenge for the SEC," said Atkins, "is separating the wheat from the chaff." The rest of us might disagree, arguing that the challenge the SEC currently faces is to prove, after Madoff, that it knows what it is doing.
It's astonishing that after all of the financial horrors uncovered in the last ten years, legislators still don't appear to have gotten it into their heads just how hard, risky and dangerous whistleblowing is. According to Watkins, the SEC is so full of people working on a daily basis with healthy companies that they can't begin to imagine how truly venal ones operate. Nor do the lawmakers appear to have any appreciation of the willful blindness - on the part of accountants, auditors, oversight bodies and federal agencies - that allows fraud and corruption to penetrate large organizations and grow for years.
But you have to wonder: If, after all the country has gone through, we still can't get this right - what more will it take?