Extract from the Report:
22. Whistleblowing
22.1 It seems strange that, whilst whistleblowing protections have been enshrined in law,185 these protections do not generally extend to whistleblowing to auditors. (185)
22.2 PID provides the statutory framework for whistleblowing by employees. It protects employees from dismissal or other detriment if they whistleblow based on a ‘reasonable belief’ that their company (or someone in it) has committed one of the following: (a) criminal offence (b) a breach of any legal obligation, (c) miscarriages of justice, (d) danger to the health and safety of any individual, (e) damage to the environment, or (f) the deliberate concealing of information about any of the above. It would be helpful to add a specific reference to deliberate misrepresentation of financial information.
22.3 PID encourages employees to raise concerns with their employer in the first instance. There is also a list of ‘Prescribed Persons’ (186) to whom employees can raise concerns directly; this includes the FRC. Employees may raise concerns directly with the FRC in relation to matters that are within the scope of the FRC’s statutory duties, including the monitoring of major and PIE audits.
22.4 Appropriately the FRC (and other Prescribed Persons) have discretion over whether to take action in response to any whistleblowing, but must, in any case, publish an annual report of the numbers of disclosures they have received and what, if any, action they have taken in response. The BEIS Select Committee (187) noted that of 25 whistleblowing cases received in the past 10 years, only three cases resulted in action. If accurate, these numbers appear worryingly small and suggest that this process is not widely understood or applied.
22.5 Audit firms or audit partners are not on the list of prescribed persons under PID. Employees may be protected if they raise concerns directly with the auditor but only “where the worker follows a procedure that has been authorised by his employer.” So, whistleblowing by employees directly to the auditor is constrained by whether the company chooses to put a formal mechanism in place to facilitate this.
22.6 This seems an unnecessary encumbrance and accordingly,
22.7 I recommend that the relevant Statutory Auditor for a particular audited PIE be added to the list of Prescribed Persons under the Public Interest Disclosure Act. 22.8 Not only employees may have information relevant to the audit and so,
22.9 I further recommend that the protections available to employees should be extended to others with a direct economic relationship with the entities being audited. These would encompass shareholders, suppliers, customers and any other creditors. Such individuals should also be afforded protection when whistleblowing to ARGA.
22.10 In order to protect against this process being abused, the protection of PID would not be available if the action was deemed to have been undertaken for the purpose of stimulating needless publicity for defamatory reasons.
22.11 I believe that whilst audit is legally defined to be used by a narrow section of society – shareholders – the application of PID to a wider population will emphasise the societal importance of the audit.
22.12 Criteria will need to be developed to guide the limits of whistleblowing to meet a materiality test. Clearly, for example, the communication of matters which may threaten the existence of the business, or relate to the behaviour of the audit committee as complicit in wrongdoing, would pass such a test.
22.13 Finally, ARGA may wish to consider how it publicises the rights of whistleblowers and, learning a lesson from the United States, whether it ought to operate a reward programme for specific instances of whistleblowing.
185 Public Interest Disclosure Act 1998 (“PID”)
186 “The Prescribed Persons Order 2014 sets out a list of over 60 organisations and individuals that a worker may approach outside their workplace to report suspected or known wrongdoing. The organisations and individuals on the list have usually been designated as prescribed persons because they have an authoritative or oversight relationship with their sector, often as a regulatory body.” Relevant disclosures to a Prescribed Person are generally protected under the Public Interest Disclosure Act 1998. Prescribed Persons are required to produce an annual report on whistleblowing disclosures made to them by workers.
187 BEIS Select Committee ibid 90 Independent Review into the Quality and Effectiveness of Audit