Recent financial fraud legislation such as the Dodd–Frank Act and the Sarbanes–Oxley Act (U.S. House of Representatives, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, [H.R. 4173], 2010; U.S. House of Representatives, The Sarbanes–Oxley Act of 2002, Public Law 107-204 [H.R. 3763], 2002) relies heavily on whistleblowers for enforcement, and offers protection and incentives for whistleblowers. However, little is known about many aspects of the whistleblowing decision, especially the effects of contextual and wrongdoing attributes on organizational members’ willingness to report fraud. We extend the ethics literature by experimentally investigating how the nature of the wrongdoing and the awareness of those surrounding the whistleblower can influence whistleblowing. As predicted, we find that employees are less likely to report: (1) financial statement fraud than theft; (2) immaterial than material financial statement fraud; (3) when the wrongdoer is aware that the potential whistleblower has knowledge of the fraud; and (4) when others in addition to the wrongdoer are not aware of the fraud. Our findings extend whistleblowing research in several ways. For instance, prior research provides little evidence concerning the effects of fraud type, wrongdoer awareness, and others’ awareness on whistleblowing intentions. We also provide evidence that whistleblowing settings represent an exception to the well-accepted theory of diffusion of responsibility. Our participants are professionals who represent the likely pool of potential whistleblowers in organizations.
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The ACFE is a U.S.-based organization that researches fraud in organizational settings and provides anti-fraud resources and training. More details are available on the organization’s website (http://www.acfe.com).
Our classification of wrongdoing and contextual characteristics is similar to that of prior research (e.g., Mesmer-Magnus and Viswesvaran 2005) and standards such as Statement on Auditing Standards (SAS) No. 99. In the U.S., SAS No. 99 is the current standard that describes the auditor’s responsibilities with respect to fraud detection, common fraudulent financial reporting and theft schemes, and conditions that can lead to fraud (AICPA 2002).
We remind the reader of research, referenced earlier, that financial statement fraud typically causes greater financial loss than theft (ACFE 2010); it is, therefore, potentially highly costly to the organization, despite possible perceptions of short-term benefits to the organization.
Gundlach et al.’s (2003) model did not indicate a direct link between attributions and whistleblowing decisions, but rather suggests that both judgments of responsibility and emotions are mediators of the relationship between attributions and whistleblowing decision. Therefore, while the attribution component of their model is relevant for our discussion, we do not provide a direct test of all assertions made within their framework.
Kaplan et al. (2010) manipulated type of fraud (financial statement fraud or theft) as part of their examination of the relationship between social confrontation and whistleblowing. Their study differs from ours in two important respects. First, Kaplan et al. (2010, p. 51) focused on social confrontation and included the two fraud types “to broaden the generalizability of the findings”. They found that fraud type did not moderate the relationship between social confrontation and whistleblowing intentions. Second, the primary dependent measure used by Kaplan et al. (2010) is the difference in reporting intentions to the participant’s supervisor or to the internal auditing department. Our focus is not on preferred report recipient, but on whistleblowing intentions in general.
SAS No. 107 guides auditors on the application of materiality (AICPA 2006). This standard indicates that auditors should not ignore quantitatively immaterial misstatements because they could, in aggregate, cause the financial statements to be materially misstated.
Research employing seriousness as an independent variable tends to adopt a similar approach, eliciting perceptions of seriousness of a scenario’s unethical behavior (Brennan and Kelly 2007). These studies elicit perceived seriousness across various scenarios and across subjects, finding generally that perceptions of seriousness increase willingness to whistleblow. However, individuals have difficulty comparing the seriousness of differing types of fraud. Of greater concern are differences in perceived seriousness between-subjects—one person’s serious infraction is another observer’s minor transgression. Therefore, a more direct test of the impact of seriousness on hotline use is the manipulation of seriousness within the experiment, rather than merely assessing individual perceptions of a given scenario.
While the wrongdoer might never definitively identify the whistleblower, the more important issue when examining whistleblowing intentions is the potential whistleblower’s perception of the likelihood that the wrongdoer might discover his/her identity. Indeed, even in the presence of ethics hotlines, employees are not always convinced that their identity will remain protected (Metropolitan Corporate Counsel 2005; Finn 1995).
The Kitty Genovese murder occurred on a New York City street in 1964. Multiple accounts of the details surrounding the murder suggest that 38 witnesses passively watched the murder from their homes for approximately 30 min. However, court transcripts and other evidence from the subsequent murder trial indicate that the story was embellished and that actual number of witnesses to the murder was much fewer than the 38. Yet, the story played an important role in stimulating psychology research into helping behavior and the diffusion of responsibility concept (Manning et al. 2007).
Darley and Latane (1968) defined the bystander effect as the tendency for individuals to choose not to help a victim of an undesirable event because others are also aware of the situation. Their explanation for this effect lies in diffusion of responsibility, or the transition of responsibility from the individual to others who also observe.
The use of human participants was approved by the appropriate university’s institutional review board, and all participants voluntarily consented to participate.
The Sarbanes–Oxley Act (SOX) is a landmark law with significant impact on financial reporting and internal controls for U.S. public companies. With respect to reporting potentially unethical acts, SOX Section 301 requires the establishment of anonymous whistleblowing methods, as through a hotline (U.S. House of Representatives 2002). The U.S. House of Representatives is one of two branches of the national legislative assembly.
We report one-tailed P values for hypothesized relationships only.
Experience appears to have minimal impact on our results. In addition to our hypotheses being robust to controlling for experience, we examined the relationship between experience and participants’ assessment of the personal costs of whistleblowing in each of the six scenarios; the personal cost question had end points of 1 = “no personal cost” and 5 = “high personal cost”. The only significant correlation was a positive relationship between experience and personal cost in the immaterial financial fraud scenario (r = 0.217, P = 0.011, two-tailed).
The Dodd–Frank Act offers potential monetary incentives in fraud cases that produce more than $1,000,000 in fines if the whistleblower provides original information that leads to the settlement of the case (U.S. House of Representatives 2010).
Kruglanski (1975, p. 103) defined demand bias as “error in inference regarding the cause of an observed effect.” Such bias may arise when subjects can discern the experimental hypothesis and are motivated to respond in a “good subject” role. Anonymous surveys of professionals, such as that used in our study, should greatly reduce that motivation (Schepanski et al. 1992).
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We are grateful to Renee Olvera, the workshop participants at the University of North Texas, and the reviewers and participants of the 1st annual AAA Forensic and Investigative Section’s midyear meeting for their insightful comments on prior versions of this paper. We thank Sally Gunz and the two anonymous reviewers whose comments have improved this paper. We also thank the professionals who participated in this study.
Financial Statement Fraud Assume you are the assistant to a divisional controller of your company. You have recently learned that your boss, the divisional controller, has established the policy that all supplies used by the entire division (office supplies, bathroom paper, and employee drinks, etc.) are to be charged to Cost of Goods Sold, rather than Supplies Expenses as required by Generally Accepted Accounting Principles, in order to meet upper management’s cost containment objectives.
Scenario 1(2) Assuming this represents 1/2 of 1% (6%) of total expenses for the company, what is the likelihood that you would report through the confidential hotline if you were in the individual’s position?
Theft Assume you are an employee in the warehouse and have observed the warehouse supervisor placing company inventory into his car.
Scenario 3(4) Assuming you are the only other person who knows of the theft and the supervisor is not (is) aware of your knowledge, what is the likelihood that you would report through the confidential hotline if you were in the individual’s position?
Scenario 5(6) Assuming you are not the only other person who knows of the theft and the supervisor is not (is) aware of your knowledge, what is the likelihood that you would report through the confidential hotline if you were in the individual’s position?
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Robinson, S.N., Robertson, J.C. & Curtis, M.B. The Effects of Contextual and Wrongdoing Attributes on Organizational Employees’ Whistleblowing Intentions Following Fraud. J Bus Ethics 106, 213–227 (2012). https://doi.org/10.1007/s10551-011-0990-y
- Diffusion of responsibility
- Fraud type