Academia’s Whistleblower Obsession

Whistleblowers are getting a lot of attention from academics these days. Just last week, in fact, we wrote about a study conducted by a group of finance professors which found that whistleblowers–employees in particular–are the most effective at finding corporate fraud. Now, another study has come out,  this one with much more troubling implications.

The study, conducted by accounting professors Jacob Rose and James Hunton, has found that landmark regulations designed to prevent financial fraud by relying on anonymous whistleblowers are dysfunctional and ineffective. The Sarbanes-Oxley Act (affectinonaetly referred to as SOX) has had unfortunate unintended consequences. Specifically, the audit committees of publicly traded companies required by SOX fail to investigate tips from anonymous whistleblowers relative to named ones–particularly when the whistleblower’s information poses a threat to corporate directors.

Professors Rose and Hunton conducted an experiment in which 83 highly experienced audit committees examined whistleblowers’ allegations of corporate reporting malfeasance, and were then asked to allocate resources for investigations. According to Professor Rose,

We concluded that audit committee members who evaluate whistle-blowing allegations and determine whether or not allegations should be investigated treat anonymous and non-anonymous allegations very differently. Audit committee members find anonymous allegations to be less credible than non-anonymous allegations. As a result, audit committee members often choose not to investigate an anonymous allegation, even when the allegation indicates very serious threats to the integrity of the financial reporting system. When an identical allegation is not anonymous, audit committees allocate significant resources to the investigation of the allegation. In brief, anonymous allegations appear to be ignored in many cases.

The anonymous whistleblowers study seems to offer strong support for the conclusion reached by the authors of the “Who Blows the Whistle on Corporate Fraud?” study. One of the conclusions of that study was that there need to be more avenues of financial compensation available to whistleblowers, considering the high personal, professional, and pecuniary stakes whistleblowers face. If the corporate audit committees required by SOX are ignoring anonymous whistleblowers, then whistleblowers need to have more external outlets through which they can both disclose fraud and receive a monetary incentive.