Accounting leads rise, making boards edgy
By Greg Farrell, USA TODAY

Two years after passage of the Sarbanes-Oxley Act, forensic accountants, corporate lawyers and the Securities and Exchange Commission are reporting a sharp increase in whistle-blower complaints about accounting problems at publicly traded companies.

The law requires public companies to add costly controls in their accounting departments and holds top executives responsible for any misleading information in financial statements.

One section of the act also provides federal protection to would-be whistle-blowers. As a result, warnings about accounting problems are reaching boardrooms at an unprecedented rate.

"There is increased whistle-blowing activity," said Harvey Kelly, a forensic accountant who heads fraud investigation at law firm Alix Partners. "There's an increased awareness on the part of people that Sarbanes-Oxley gives protection to individual whistle-blowers."

Kelly says it's difficult to quantify the increase in whistle-blower complaints. He says his firm has received a steady stream of calls from boards of directors about internal allegations of accounting fraud.

"Whistle-blowing has become almost a common feature of corporate life," said Michael Young of Willkie Farr & Gallagher, a law firm that investigated accounting fraud at Cendant. "I've been hearing it and living it."

Young says the increase in complaints has put boards of directors in a difficult spot. "In this environment, every eruption has to be seriously considered," he said. "What if somebody writes on the back of a candy wrapper that your bad debt is underfunded? Do you take it seriously? Do you have to launch an investigation?"

Kelly says that's happening at many companies. Boards are asking him to determine which complaints are unfounded grumblings from disgruntled employees and which are legitimate claims of accounting fraud.

"The concept of audit committees not wanting to get second-guessed is creating a much more robust volume of internal investigations," he said.

The SEC receives tips about possible violations of securities laws through its e-mail complaint service (www.sec.gov/complaint.shtml). Complaints jumped from 77,000 in 2001 to 180,000 last year. The SEC has received nearly 250,000 complaints this year.

More than 1,300 e-mail complaints arrive each day, says John Stark of the SEC's enforcement division. The majority tend to be tips about accounting problems at public companies.

"It's a tremendous source of leads," Stark said.