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INVESTIGATING THE ETHICAL IMPLICATIONS OF WHISTLEBLOWING WITHIN ACCOUNTING

Near and Miceli (1985, 4) define whistleblowing as “the disclosure by organization members (former or current) of illegal, immoral, or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action.” The decision to blow the whistle often presents an ethical dilemma for the whistleblower and depends on many factors that include differing perceptions of duties, loyalties, and obligations. Employees within an organization often feel a moral obligation to report wrongdoing and are more likely to do so when the work environment supports and encourages ethical behavior and whistleblowing (Alleyne, Hudaib, and Haniffa 2018). They must also consider the possible negative consequences of blowing the whistle, specifically retaliation and personal costs, as well as costs to the company involved.

Whistleblowing research is diverse and has expanded rapidly over the last decade. While multiple studies have investigated topics such as characteristics of the whistleblower, the wrongdoing, and the organization (see Gao and Brink [2017] for a review of this literature), we focus on the ethical considerations of the whistleblowing process. It is undeniable that accountants are in a unique position to both observe as well as take part in financial wrongdoing, as accountants within organizations provide crucial bookkeeping, auditing, taxation, and overall financial analysis services, while external auditors provide attestation services. The importance of whistleblowing is exemplified by multiple famous cases including Enron and WorldCom.

Analysis of the ethical aspects of whistleblowing is important, as accountants operate under the American Institute of Certified Public Accountants’ (hereafter AICPA) Code of Professional Conduct, which requires AICPA members to “discharge their responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public” (AICPA 2018, 5). The code also states that “The accounting profession’s public consists of clients, credit grantors, governments, employers, investors, the business and financial community” and “members may encounter conflicting pressures from each of those groups” (AICPA 2018, 5). Paeth (2013) suggests that conditions that warrant whistleblowing exist when the multiple loyalties an individual faces come into conflict with each other. In such circumstances, at least one loyalty may have to be sacrificed. Professional responsibilities are not unique to accountants, as many other professions also have a public interest emphasis, and within engineering, Bouville (2008) suggests that whistleblowing is mandatory for engineers whose code of the National Society of Professional Engineering has as its first canon duty to the public. Extending this logic suggests that accountants should also have a duty to report any observed misconduct given the emphasis on the public interest in the AICPA Code and similar codes of conduct for accountants (e.g., Institute of Management Accountants (hereafter IMA), Institute of Internal Auditors (hereafter IIA), Chartered Accountants Australia and New Zealand (hereafter CA ANZ), Institute of Chartered Accountants in England and Wales (hereafter ICAEW), etc.).

The remainder of the chapter is organized as follows: In the first section, we examine whistleblowing and its importance in accounting. Second, we explore the various reporting channels available for whistleblowers and under what conditions the various channels may be used. Third, we highlight ways that companies can encourage whistleblowing behavior in terms of both organizational and individual characteristics. Finally, we look at the ethical implications of the whistleblowing process by analyzing the impact of whistleblowing on the two primary parties affected: the whistleblower and the company involved.

Whistleblowing has been addressed in many different disciplines and contexts. This chapter addresses whistleblowing in the accounting context. Shareholders and other stakeholders make financial decisions based on financial statements, and thus it is imperative that the financial statements are not materially misstated. Understanding whistleblowing in the accounting context is therefore critical. Accountants and auditors effectively serve as corporate monitors and are often in a position to observe financial wrongdoing early in the process, when they can help minimize costs related to such frauds by blowing the whistle in a timely fashion (Seifert et al. 2010). According to its 2018 Global Study on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (hereafter ACFE) (2018), finds a direct and consistent relationship between fraud duration and median loss (associated with the fraud); frauds lasting over five years cost 20 times as much as frauds detected within the first six months.

Types of accounting-related misconduct that may warrant whistleblowing include many different egregious acts beyond fraud. Lee and Xiao (2018) identify 59 studies investigating accounting-related whistleblowing during their sample period of 1991 to 2017. Of these 59 studies, 40 included investigation of some sort of fraudulent act including misappropriation of assets, embezzlement, bribery, and corruption. However, the second most common type of whistleblowing investigated is violation of auditor independence and/or the Code of Professional Conduct (with ten studies included in their sample period), thus highlighting the importance of whistleblowing for accounting misconduct beyond fraud (Lee and Xiao 2018). One of the broadest studies on types of accounting misconduct and whistleblowing is Bowen, Call, and Rajgopal (2010). They investigate whistleblowing allegations against firms from 1989 through 2004 and identify overbilling, earnings management, price fixing, insider trading, tax fraud, and improper disclosure as specific types of accounting activities that necessitated whistleblowing. It is important to note that although fraud is often thought of as the most prominent type of accounting-related whistleblowing, accountants may certainly encounter other types of illegal, immoral, or illegitimate practices that may warrant blowing the whistle.

The importance of identifying fraud is highlighted by the ACFE (2018, 6) who states “Fraud in general poses a tremendous threat to organizations of all types and sizes, in all parts of the world.” In the AFCE’s 2018 Global Survey on Occupational Fraud and Abuse, participating certified fraud examiners (CFEs) report a median estimated fraud loss of approximately 5% of annual firm revenues. Because we cannot possibly know of all global cases of occupational fraud, it is impossible to calculate an accurate total global fraud loss. However, when the reported estimated annual revenue loss of 5% is applied to a 2017 estimate for gross world product of $79.6 trillion, an estimated global loss to fraud would be approximately $4 trillion. In the same report, the ACFE estimates total fraud losses of over $7.1 billion in the 2,690 fraud cases investigated between January 2016 and October 2017 (ACFE 2018). While 48% of the reported fraud cases occurred within the United States, other global regions are certainly not immune to fraud, as 13% of the cases occurred in Sub-Saharan Africa and another 11% of the cases were in the Asia-Pacific region. Interestingly, while the vast majority of reported frauds occurred in the United States, the reported median loss of $108,000 in the United States was among the smallest reported, while the median loss of $236,000 in the Asia-Pacific region was the largest reported.

The accounting profession plays a vital role in the whistleblowing process, and whistleblowing has become “an effective mechanism to detect fraud” (Lee and Xiao 2018, 22). The US Securities and Exchange Commission (hereafter SEC) (2014, 1) even acknowledges that whistleblowers “perform a great service to investors and help us combat fraud.” As a result, the SEC has awarded millions of dollars to whistleblowers for assisting in resolving complicated fraud schemes through the SEC’s whistleblower program authorized by the Dodd-Frank Act (SEC 2017). Awards can range from 10% to 30% of the money collected in a fraud case. While the Foreign Corrupt Practices Act affords whistleblowers from outside of the US protection against retaliation (Global Whistleblower 2018), recently the European Commission published a proposed directive for whistleblower protection across the European Union (European Commission 2018). Recent improvements in whistleblower protection have also been enacted in both China in 2016 (vandePol, Wu, and Hui 2016) and Korea in 2018 (Anti-Corruption and Civil Rights Commission, Republic of Korea 2018).

Though numerous studies have highlighted the importance of whistleblowing, there remains a reluctance to blow the whistle on misconduct (Lee and Xiao 2018; Miceli, Near, and Dworkin 2008). The Ethics Resource Center (2012) reported that of the 41% of surveyed employees who observed wrongdoing in their workplace, 33% did not report it. This silence is typically a result of the organizational environment in which the employees work. Near and Miceli (1985) note that organizational structure and ethical climate can encourage or discourage whistleblowing. Whistleblowing intentions are also influenced by the potential whistleblower’s perception of organizational support and whether the company will change the wrongdoing (Gao and Brink 2017).

Accountants who are in a position to stop wrongdoing and decline to do so shirk their moral duty to act by turning a blind eye. Nearly all practicing accountants are governed by some sort of code of conduct. Certified public accountants (CPAs) are governed by the AICPA Code of Professional Conduct, which includes a “Responsibilities” principle that states: “In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities” (AICPA 2018, 5). Similarly, certified management accountants (CMAs) are guided by the standards of ethical practice of the Institute of Management Accountants (IMA), while the Institute of Internal Auditors (IIA) and both the Chartered Accountants Australia & New Zealand (CA ANZ) and the Institute of Chartered Accountants in England and Wales (ICAEW) have similar codes of conduct for ethical guidance of internal auditors and chartered accountants, respectively. More broadly, just recently the International Federation of Accountants (IFAC) rewrote its Code of Ethics to make the code easier to use, navigate, and enforce for the approximate 2.8 million accountants in public practice, industry, government, commerce, and education in over 130 countries and jurisdictions that constitute the IFAC (IFAC 2018).

Since corporate accountants are most likely to be the first to observe financial misconduct, many of the financial frauds over the last 20 years were not discovered by external auditors but rather were discovered and reported by employees who had access to accounting information. In fact, it was determined that external auditors were directly involved with or complicit in covering up some of the largest financial frauds, with Arthur Andersen first being fined $7 million by the SEC for its involvement in the Waste Management fraud and then later being indicted in the Enron fraud (Corporate Finance Institute 2018). Beyond a perceived responsibility to act, auditors have a greater professional duty to report known instances of fraud. With the public and other external stakeholders relying on auditors to certify that the financial statements are free of material misstatement, whether caused by error or fraud (PCAOB 2015), auditors inherently face a higher standard of duty (to the public and greater society) than the internal accountant when it comes to blowing the whistle. As such, it is imperative to understand the role of auditors in the whistleblowing process and the related implications from such a role.

Accounting research has looked at auditing and whistleblowing from several different perspectives. Some of the prior research related to whistleblowing and auditors focuses on the likelihood of auditors reporting wrongdoing within a public accounting firm (Kaplan 1995; Curtis and Taylor 2009; Taylor and Curtis 2013). Kaplan (1995) suggests that when a necessary audit step has been omitted and when the wrongdoer has a poor work history, auditors are more likely to blow the whistle. Curtis and Taylor (2009) find auditors with high moral intensity, an internal locus of control, and those who trust the firm to remedy the wrongdoing are more likely to internally report wrongdoing. Taylor and Curtis (2013) note that an auditor is more likely to report wrongdoing of a colleague over a supervisor, particularly when the organization has failed to act on wrongdoing in the past, suggesting that the whistleblower can get credit for reporting the wrongdoing while not actually causing problems for their colleague. Additionally, Robertson, Stefaniak, and Curtis (2011) look at an auditor’s propensity to blow the whistle on another auditor when it involves professional responsibility. They find that experienced auditors are more likely to blow the whistle, and they prefer to do so internally, preferably on a wrongdoer who is not very likeable. However, Robertson, Stefaniak, and Curtis (2011) also find that auditors are more likely to blow the whistle externally when there are greater professional repercussions for failing to do so.

Accounting research also explores whistleblowing as it relates to the audit client and the auditor (Kaplan, Pope, and Samuels 2011; Curtis and Taylor 2009; Dyck, Morse, and Zingales 2010). Kaplan, Pope, and Samuels (2011) observed auditors as recipients of financial misconduct disclosures. They find that when an auditor makes a direct fraud-related inquiry of the client, client personnel are more likely to disclose knowledge of wrongdoing to the inquiring auditor. They also find that employees are more likely to disclose suspected wrongdoing to internal auditors over external auditors.

Unfortunately, the auditor is often poorly incentivized to act as a whistleblower (see discussion of monetary incentives within the “Environmental Characteristics” section), and the whistleblowing act is not without consequences to the auditor. Dyck, Morse, and Zingales (2010) note that auditors who blow the whistle are more likely to lose the account of the company involved in the fraud. Additionally, they find that after a fraud is revealed, the client is more likely to replace the auditor, and even more so if the auditor reveals the fraud. While auditors may incur reputational damage from blowing the whistle and being replaced, other research suggests that auditors don’t always lose from whistleblowing. Fuerman (2006) finds that even though the market knew that Arthur Anderson’s auditing had deteriorated before the Enron scandal, the firm’s market share did not decline. In addition, Chen and Zhou (2007) find that poorly governed firms look for low-quality auditors, and Dyck, Morse, and Zingales (2010) find that there are minor positive reputation effects that increase the probability of auditors who have blown the whistle gaining new clients. Overall, incentives for auditors to blow the whistle are relatively weak. The more negative impacts on reputation, loss of clients, and not being able to attract new clients outweigh the small benefits of blowing the whistle for an auditor.

Auditors are undisputedly an integral part of the whistleblowing process. Though some research suggests that auditors hesitate to report wrongdoing by colleagues, other research notes that auditors will not hesitate to blow the whistle on other auditors under certain conditions. Auditors also tend to be recipients of potential whistleblowing information. Along with their perceived moral responsibility to act, auditors have an incentive to uphold their professional duties. The AICPA (2002) statement of auditing standards (SAS 99) section 316 requires the auditor, once there is evidence that a fraud may exist, to bring the matter to the attention of the proper level of management; at least one level above those involved.

The importance of providing multiple possible means of whistleblowing to employees cannot be understated, as logic dictates that an employee who does not feel comfortable blowing the whistle will hesitate to do so. Best practices advise implementing multiple reporting channels within an organization (Kaplan et al. 2012) to maximize the likelihood of reporting, since employees use a variety of channels to report fraudulent behavior. The most common way in which occupational frauds are detected is through employee tips, which are received through a variety of reporting channels, including telephone hotlines, email, fax, or direct reporting to a supervisor, executive, or internal and external auditors (ACFE 2018). Organizations that track reports from reporting channels beyond just hotlines and web submissions have higher reporting volumes, with 7.3 reports per 100 employees when tracking only web and hotline reports, compared to 14.8 reports per 100 employees when tracking all reporting channels (Navex Global 2018). These organizations have incident management systems that capture reports from other reporting channels including letters, direct emails, and open-door reports. Furthermore, the reports made through these “other” reporting channels had the highest rate of substantiation (i.e., merit) (Navex Global 2018).

Academic research provides insight into why employees may utilize various whistleblowing channels to report fraudulent or unethical behavior. Deciding whom to report to is an important decision for whistleblowers, as it may influence how the organization responds to the whistleblower, any retaliation that may occur, and the effectiveness of the whistleblowing process (Dworkin and Baucus 1998). For example, employees face more retaliation when they use external whistleblowing channels (Miceli, Near, and Dworkin 2008). Research shows that an employee’s decision to report unethical or fraudulent behaviors is driven by a variety of personal and contextual factors (Gao and Brink 2017) that influence their use of certain reporting mechanisms.

Reporting channels are commonly classified into two groups in the academic literature: internal and external channels. Internal reporting involves reporting to someone within the organization who has the ability to address the reported issue (Dworkin and Baucus 1998). Examples of internal reporting channels include internal hotlines, reporting to the internal audit group, or reporting to a supervisor uninvolved in the wrongdoing. External reporting, on the other hand, involves reporting wrongdoing to parties outside the organization, such as a federal agency or the media (Dworkin and Baucus 1998; Kaptein 2011), where the reporting channel is not under the organization’s control (Kaplan et al. 2012; Culiberg and Mihelič 2017). Research suggests that in the majority of whistleblowing cases, employees first utilize internal channels to report wrongdoing (e.g., Miceli, Near, and Dworkin 2008; Lee and Xiao 2018). It is when they feel their concern is not properly addressed that they may resort to external channels (Near and Miceli 2016).

Whistleblowers consider a variety of factors in determining which type of channel to use and weigh the costs and benefits of reporting to aid in this determination (Kaptein 2011; Culiberg and Mihelič 2017). This is an important consideration, as external whistleblowers are more effective at generating organizational change but also experience greater retaliation within the organization (Dworkin and Baucus 1998). Research shows Barbadian accounting employees’ intentions to blow the whistle internally and externally are negatively related to employees’ perceived personal cost of reporting and positively related to employees’ perceived personal responsibility for reporting. Interestingly, the seriousness of the wrongdoing is only related to external whistleblowing intentions (Alleyne et al. 2017).

Factors outside of a whistleblower’s formal decision-making process are also associated with the use of internal or external reporting channels. Research finds various organizational and personal characteristics are related to a whistleblower’s preference for internal and external reporting. Nayir, Rehg, and Asa (2018) provide evidence that individual ethical value orientation (idealistic versus relativistic) and a company’s business sector (private versus public) influence reporting channel preferences. They find that idealistic individuals prefer internal channels and are less likely to prefer anonymous channels. Relativistic employees, on the other hand, prefer external reporting channels compared to idealistic employees, with private sector relativistic employees showing the greatest preference for reporting via external channels. Relativism is also positively associated with preferences for anonymity in the reporting process. Nayir and Herzig (2012) also find that both individualistic cultural value orientations and, unexpectedly, collectivistic cultural value orientations are both positively associated with a preference for external channels and anonymity in reporting.

Beyond an individual’s personal ethical values and cultural values, an organization’s ethical culture also influences employees’ responses to ethical wrongdoing and the use of internal and external whistleblowing channels. Based on a survey of the US working population, use of external channels is associated with a weak ethical culture (Kaptein 2011). As expected, increased transparency of the wrongdoing within an organization (where multiple individuals are aware of the unethical behavior) is positively associated with external whistleblowing. The belief that the perpetrator will be punished (sanctionability), the extent to which ethical issues can be discussed within the organization (discussability), and the extent to which local and senior managers apply organizational standards to their own behavior (congruency) are all negatively associated with external reporting (Kaptein 2011).

Perceived organizational support (POS) is found to moderate the relationship between multiple individual factors and whistleblowing intentions, further highlighting the importance of organizational culture (Alleyne, Hudaib, and Haniffa 2018). High levels of POS magnify the positive relationships between internal whistleblowing intentions and attitude to report, perceived behavioral controls, commitment to auditor independence, and perceived responsibility for reporting. High levels of POS also strengthen the negative relationship between perceived cost of reporting and the intention to blow the whistle internally. Perceived organizational support can also influence an employee’s decision to blow the whistle externally. When the level of POS is low, the positive relationship between intention to blow the whistle externally and attitude to report and the positive relationship between intention to blow the whistle externally and perceived behavioral controls both are strengthened. Lastly, the positive relationship between POS and intention to blow the whistle externally is strengthened when POS is high (Alleyne, Hudaib, and Haniffa 2018).

Additional individual characteristics positively associated with the use of external reporting channels are shorter organizational tenure (< 4.5 years) and employees with strong evidence of wrongdoing, as employees with longer tenure and those with limited evidence of wrongdoing tend to use internal channels (Dworkin and Baucus 1998). The outcome of the ethical situation, whether it involves physical harm, economic harm, or psychological harm, is not associated with reporting channel (Dworkin and Baucus 1998); similarly, the type of unethical activity – misappropriation of assets or fraudulent financial reporting – is not associated with reporting intentions or reporting recipient (Kaplan, Pope, and Samuels 2010).

A relatively limited amount of research has directly assessed the use of internal and external reporting channels. Much of the research related to whistleblowing channels has focused heavily on intentions to use anonymous versus non-anonymous channels, largely motivated by the Sarbanes-Oxley Act (SOX). SOX enhanced whistleblower protections and required all public organizations to implement an anonymous reporting channel allowing employees to report suspected unethical or fraudulent behavior without providing identification ( Johansson and Carey 2016). The research in this area exclusively considers internal whistleblowing channels. It manipulates various characteristics associated with internal reporting channels, including whistleblower anonymity, to better understand the effect these factors have on an individual’s whistleblowing intentions.

Intention to report using anonymous reporting channels is associated with gender, as females are more likely than men to report fraud when anonymity is provided (due to women’s perceptions of reduced personal costs when using such channels [Kaplan et al. 2009a]). Prior whistleblower retaliation also influences intentions to report under anonymous and non-anonymous channels. The presence of prior whistleblower retaliation is associated with decreased intentions to report wrongdoing using a non-anonymous channel (Kaplan et al. 2012). However, the absence of prior whistleblower retaliation does not influence intentions to report using anonymous channels. Additionally, when there were no negative consequences for a prior perpetrator and when an anonymous reporting channel is available compared to a non-anonymous channel, individuals have higher intentions to report (Kaplan et al. 2012).

Kaplan and Schultz (2007) and Curtis and Taylor (2009) both consider the effect of having multiple reporting channels, which we discuss as being very important for organizations to implement. Kaplan and Schultz (2007) investigate how the presence of an anonymous reporting channel impacts the use of two non-anonymous channels that are also available. The results suggest that when an anonymous channel is present, intentions to report using the non-anonymous channels decrease. In a public accounting setting, Curtis and Taylor (2009) find that an anonymous hotline and one where the whistleblower’s identity is protected do not result in significantly different reporting likelihoods. However, auditors are less likely to report wrongdoing when their identity is not protected. Type of wrongdoing has not been found to be associated with the use of anonymous or non-anonymous reporting channels (Kaplan and Schultz 2007; Near et al. 2004).

While the decision to blow the whistle is seldom an easy one, within this portion of the chapter we seek to identify both individual and environmental characteristics that can promote whistleblowing. Miceli, Near, and Dworkin (2008) identify both personality characteristics and demographic characteristics as two types of individual whistleblower characteristics that may affect whistleblowing intentions. Personality characteristics or traits have been investigated in multiple studies where whistleblowing intentions have been associated with an internal locus of control and a judging ethical style (Curtis and Taylor 2009), professional identity and organizational commitment (Taylor and Curtis 2010), lower levels of Machiavellianism (Dalton and Radtke 2013), and higher levels of conscientiousness and extroversion, as well as idealistic ethical positions (Brink, Cereola, and Menk 2015).

Demographic characteristics associated with whistleblowing intentions include female MBA students (Kaplan et al. 2009b), early career male accountants and female accountants age 45 years and older (Liyanarachchi and Adler 2011), and female older accounting professionals (Erkmen, Caliskan, and Esen 2014). In the broader population of organizational employees, Mesmer-Magnus and Viswesvaran (2005) conduct a meta-analysis of 26 samples from 21 articles and find that while older employees have a greater intent to blow the whistle, females and employees with a longer tenure with the company have a slightly greater likelihood of actually blowing the whistle. These studies are certainly not exhaustive of all potential personality and demographic characteristics, and thus, at this stage, it is difficult to paint a picture of the ideal whistleblower. The call for future research in this area is echoed by Gao and Brink (2017).

Environmental characteristics associated with whistleblowing intentions consist of a wide variety of factors. Near and Miceli (1995) suggest characteristics of the organization including appropriateness of the whistleblowing, a climate supportive of whistleblowing, a less bureaucratic structure, and an environment with low organizational power are favorable conditions for blowing the whistle. Additionally, Miceli, Near, and Dworkin (2008) identify three types of “situational” variables, including (1) characteristics of the perceived wrongdoing (such as seriousness or magnitude of the wrongdoing, type of wrongdoing, wrongdoer power or status, and supervisor support and quality of evidence), (2) characteristics of the organization (such as organizational climate or culture of supportiveness for whistleblowing, and industry type – public versus private), and (3) characteristics of the country or culture (such as level of individualism, uncertainty avoidance, and other social tendencies). In this study, we focus on organizational characteristics, as well as both internal and external incentives, since we seek to identify characteristics that can promote whistleblowing. Organizational climate (including ethical climate) and organizational structures associated with promoting whistleblowing intentions include formal structures and training (associated with reporting confidence) (Brennan and Kelly 2007), procedural justice, distributive justice, and interactional justice (Seifert et al. 2010), a strong ethical environment (Dalton and Radtke 2013), and a vivid anti-retaliation policy (Wainberg and Perreault 2016).

Additionally, some sort of internal incentive is often offered by the organization as a means to promote whistleblowing, in addition to the incentives offered by the SEC’s Office of the Whistleblower’s bounty program. Feldman and Lobel (2010, 1160) present a legal analysis and experiment investigating the four most common strategies available to promote whistleblowing, which are “providing employees with antiretaliation protections, creating a duty to report, imposing liability for failure to report, and incentivizing reporting with money.” They design an experimental survey with eight different combinations of the four strategies and find respondents faced with both “Duty” and “High Reward” are the most likely to self-report the personally discovered wrongdoing. Respondents in both the “Duty and High Reward” condition, and the “High Reward” (alone) condition had the highest scores for the likelihood that others would report the corporate misconduct. While these results suggest that the magnitude of the available reward is a critical factor for potential whistleblowers, the authors also point out that a crowding-out effect may occur, wherein monetary incentives take the place of other types of motivations and unintentionally lead to a lower likelihood of whistleblowing.

Xu and Ziegenfuss (2008) suggest that cash or employment contract rewards can be effective in promoting internal auditors to blow the whistle, and Rose, Brink, and Norman (2018) find that compensation with restricted stock along with large financial rewards can promote managers’ whistleblowing. Brink, Lowe, and Victoravich (2013) find that employees’ SEC reporting intentions are the greatest when there is a combination of strong evidence along with an internal incentive in the form of a cash reward, and Pope and Lee (2013) find that individuals are more likely to report and even disclose their identity when a financial incentive is provided. Guthrie and Taylor (2017) investigate a setting with both monetary incentives and retaliation threat and find that monetary incentives increase organizational trust, which leads to higher whistleblowing intent, but only when the threat of retaliation is low.

Berger, Perreault, and Wainberg (2017) find financial incentives are positively associated with internal whistleblowing, but only when the fraud is large enough for the whistleblower to qualify for a reward. They also suggest (2017, 10) a crowding-out effect, as when the size of the fraud does not meet the minimum threshold and financial incentives are available for a qualifying fraud, potential whistleblowers will both

Of the four common strategies available to promote whistleblowing (Feldman and Lobel 2010), most studies have investigated the monetary incentives option. Two recent studies, however, investigate both rewards and penalties in an attempt to assess which may be more effective. Boo, Ng, and Shankar (2016) employ an audit setting and both a reward-based (carrot) and penalty-based (stick) career-related incentive scheme to investigate auditors’ likelihood of reporting an audit partner’s wrongdoing that impairs financial reporting quality. The presence or absence of a close working relationship with the wrongdoer is also manipulated in their experiment. Results show a reward-based incentive scheme is associated with a lower likelihood of whistleblowing when a close working relationship is present than when it is absent. A penalty-based incentive scheme increases the likelihood of whistleblowing regardless of the presence of a close working relationship. These results suggest that in industries where most working relationships are close (such as the accounting profession), a penalty-based (instead of a reward-based) incentive structure may be more successful in promoting whistleblowing behavior.

Chen, Nichol, and Zhou (2017) also investigate both rewards and penalties, along with a company’s descriptive norms supporting internal whistleblowing. In an experimental study, subjects report a greater likelihood of internal whistleblowing under both the threat of penalty for non-reporting and the presence of strong descriptive norms supporting whistleblowing. Thus, both Chen, Nichol, and Zhou (2017) and Boo, Ng, and Shankar (2016) support the premise of a penalty-based incentive being more effective than a reward-based incentive under certain working conditions.

Effective whistleblowing depends on many different factors. This chapter focuses on the importance of whistleblowing for accounting while examining characteristics of a whistleblower (both individual and environmental), incentives to blow the whistle, and the available channels to do so. The prior discussions help frame the ethical implications of whistleblowing in accounting.

Whistleblowing presents an ethical dilemma, and potential whistleblowers must consider both costs and benefits of reporting wrongdoing. Research has linked whistleblowing to situations high in perceived moral intensity and individuals who perceive a responsibility to report wrongdoing (Latan, Ringle, and Jabbour 2018). Though an individual may be driven by his/her conscience to report wrongdoing, acting on moral responsibility does not always earn an employee a favorable result. While the moral courage of a whistleblower is often viewed as heroic, no good deed goes unpunished. Since whistleblowing involves one person reporting another person’s suspected wrongdoings, one potential implication of whistleblowing is that an individual can become the target of retaliation by the accused wrongdoer and even by the employing company.

Internally, the accused perpetrator may find out who the whistleblower is and retaliate in some way. While some research suggests that retaliation is not inevitable (Soeken and Soeken 1987), the 2011 National Business Ethics Survey finds that 22% of employees who blew the whistle reported experiencing retaliation of some kind (Ethics Resource Center 2012). Additionally, and potentially even more worrisome, 39% of employees who blew the whistle believed that, as far as they knew, their complaint was ignored and not investigated (Ethics Resource Center 2012). When employees perceive the threat of retribution or retaliation to be low, they are more likely to utilize internal whistleblowing channels (Ethics Resource Center 2012), which are certainly the preferred channels from the point of view of companies (Near and Miceli 2016). Companies have also been known to punish whistleblowers when wrongdoing is reported to an external agency (Mesmer-Magnus and Viswesvaran 2005; Miceli, Near, and Dworkin 2008). Rather than outright salient retaliation, employees are more likely to experience micro-aggressive acts as well as subtle harassment and physical threats such as exclusion from decision-making or other workplace activities, a cold shoulder from coworkers, and verbal abuse from a supervisor or other manager (Soeken and Soeken 1987; Malek 2010; Ethics Resource Center 2012). Companies may be less likely to openly retaliate against a whistleblower due to protections afforded whistleblowers through whistleblower legislation. As previously discussed, improved whistleblower protection is a topic of international importance (e.g., Global Whistleblower 2018; European Commission 2018; vandePol, Wu, and Hui 2016; Anti-Corruption and Civil Rights Commission, Republic of Korea 2018).

There are also some potential benefits from whistleblowing. Taylor and Curtis (2010) find that greater moral intensity associated with the wrongdoing increases the likelihood of an employee reporting, suggesting that an employee often just wants to do the right thing. Relatedly, “peace of mind” may accrue from acting conscientiously, as was the case for nuclear power plant quality control inspector Charles Atchinson, who stated with respect to his whistleblowing, “I know I did right. And I know I’ll always sleep right. I’ll sleep just like a baby” (Kleinfield 1986). In this case and no doubt many others, the whistleblower benefits from the personal satisfaction that whistleblowing was the morally correct course of action for him/her in the situation at hand. Ultimately, potential whistleblowers must weigh the costs (trouble of reporting, risk of retaliation, and discomfort) and benefits (clear conscience and monetary reward) of reporting or not reporting wrongdoing, along with the dilemma between the duty of loyalty to the organization and duty of protection of others (the public interest) (Paeth 2013).

Public companies are required by SOX to implement anonymous reporting channels for unethical accounting issues (US House of Representatives 2002), as available organizational structure and support directly influence the decision to blow the whistle. Effective whistleblowing requires both an ethical culture that supports whistleblowing and a company that is willing to attempt to change any discovered/reported wrongdoing.

Several studies find that formal structures, ethical environments, and organizational support are positively associated with employees’ whistleblowing intentions (Brennan and Kelly 2007; Curtis and Taylor 2009; Dalton and Radtke 2013; Taylor and Curtis 2013; Zhang, Pany, and Reckers 2013). Curtis and Taylor (2009) suggest that the auditor is most likely to report wrongdoing if the auditor trusts that the company will investigate reports of wrongdoing, while Brennan and Kelly (2007) find that larger companies are more likely to provide formal reporting structures. However, Bowen, Call, and Rajgopal (2010) and Lee and Xiao (2018) note that larger companies are also more likely to experience external reporting rather than internal reporting for whistleblowing.

External whistleblowing is more detrimental to a company than internal whistleblowing. Internal reporting of wrongdoing allows a company to correct the wrongdoing before outside regulators and/or monitors get involved. External whistleblowing leads to higher regulatory penalties, lower subsequent stock market performance, and a greater likelihood of a subsequent lawsuit for the company involved (Bowen, Call, and Rajgopal 2010; Call et al. 2017). Although companies may initially suffer negative economic consequences from external whistleblowing, as evidenced by the negative five-day stock price reaction found by Bowen, Call, and Rajgopal (2010), as well as additional negative consequences such as earnings restatements, these companies are subsequently less likely to engage in future wrongdoing and are more likely to improve their reporting and corporate governance after the whistleblowing event. These efforts often include potentially replacing their CEO, reducing both the size of their board of directors and the number of insider members on the board, and identifying board members who are less busy and more likely to have meaningful time to spend contemplating corporate governance issues (Bowen, Call, and Rajgopal 2010).

Extant accounting research has examined characteristics of both whistleblowers and organizational environment. In trying to encourage whistleblowing in cases of wrongdoing, companies can diversify hiring to bring on employees who are not afraid to challenge the status quo or authority when appropriate, or employees with diverse opinions and worldviews who welcome and champion those willing to have their voice heard. Miceli and Near (1992) suggest that companies can use demographic characteristics and other traits to help identify potential whistleblowers, including a higher level of moral judgment, high self-confidence, and values supporting whistleblowing. However, the ACFE (2018) indicates that background checks are not effective at identifying perpetrators, as over half of the companies that reported fraud had conducted a background check on the fraud perpetrator. Additionally, hiring practices that strive to identify potential whistleblowers or fraud perpetrators may have unintended consequences by resulting in discrimination against potential employees. Companies should proceed with caution in developing such practices to avoid the reputational and legal ramifications related to discrimination.

In terms of organizational environment, both Dalton and Radtke (2013) and the 2011 National Business Ethics Survey (Ethics Resource Center 2012) observe that reporting intentions are influenced by a company’s ethical environment in that a strong ethical environment (consisting of a strong ethics program and culture, ethical leadership, and employee buy-in) both reduces the risk of misconduct and also increases the likelihood of reporting if/when misconduct occurs. The implications from these studies strongly support companies creating an ethical work environment supportive of a formal whistleblowing process consisting of employees who are willing and able to act as whistleblowers. While companies cannot eliminate all possible risk of wrongdoing, a strong ethical environment can go far in minimizing the need for whistleblowers.

In this chapter, we explore many facets of whistleblowing within accounting. We can conclude that an employee’s desire to blow the whistle is often outweighed by consideration of the implications to both the individual and the company involved in the wrongdoing. The whistleblowing decision is also affected by the available reporting channels, along with characteristics of the organization including the incentive structure (if any) and the organization’s ethical climate. Thus, while whistleblowers are often viewed as brave and morally correct, the negative consequences often negate the desire to blow the whistle.

As previously discussed, accountants have an obligation to serve the public interest, and indeed, the public may generally believe that auditors have a responsibility to expose financial wrongdoing. PCAOB board member Jeanette Franzel recently discussed sources of the continuing expectations gap between what the public believes auditors are responsible for and what auditors believe their responsibilities to be (PCAOB 2016). This general misconception by the public that an audit is designed to expose fraud is consistent with the fact that the vast majority of frauds are not identified by externals audits (only 4% in the 2018 Global Study on Occupational Fraud and Abuse (ACFE 2018)). Thus, the importance of whistleblowing is heightened within this setting, as whistleblowers ultimately take on a public duty to strive to maintain trust between the company and the public.