Case 3

1.What steps must you take to be eligible to blow the whistle to the SEC under the Dodd- Frank Financial Reform Act? As director of internal auditing at Rite Aid, internal accountants are eligible to become Dodd-Frank whistleblowers in three situations: (1) Disclosure to the SEC is needed to prevent "substantial injury" to the financial interest of an entity or its investors; (2) the whistleblower "reasonably believes" the entity is impeding investigation of the misconduct (e.g., destroying documents or improperly influencing witnesses); or (3) the whistleblower has first reported the violation internally and at least 120 days have passed with no action. Using Exhibit 3-13, the director of internal auditing should take concerns to his supervisor, possibly the Audit Committee, the CEO, or general legal counsel for the firm. You should prepare a memo explaining how the inventory scheme does not comply with the professional standards and how it is creating a material misrepresentation of fact. As the concerns are discussed with the supervisor, you should ask that an adjustment be made to resolve the misrepresentation. If no adjustment is made, then you should take your concerns to a higher level (CEO, Audit Committee, or the Board of Directors). After all internal channels are exhausted; you should ask whether there is any responsibility or obligation to communicate with third parties like regulatory agencies or employer's external auditors, all the while seeking legal advice. You should document your understanding of the facts, accounting principles, auditing standards, and applicable laws and regulations. If no safeguards exist to eliminate or reduce the threats to an acceptable level or appropriate action was not taken, then you should consider continuing with the firm, taking appropriate action to eliminate exposure to subordination of judgment, and consider resigning from your position. Resigning does negate disclosure requirements to regulatory agencies or the external auditors.