The results of this study suggest that, while both types of incentive schemes are effective in promoting whistle-blowing behavior in the absence of close working relationships, the effectiveness of a rewarding incentive scheme is more likely to be undermined by the presence of close working relationships than a penalizing incentive scheme. 

Boo, E., T. B. Ng, and P. G. Shankar. 2016. Effects of Incentive Scheme and Working Relationship on Whistle-Blowing in an Audit Setting. Auditing: A Journal of Practice and Theory 35 (4): 23 – 38. 

Prior research shows that providing an incentive, either in the form of a reward or a penalty, can help promote whistle-blowing behavior. Other studies show that close relationships between employees can exert a negative impact on whistle-blowing behavior. An important yet unanswered question is whether and to what extent the effectiveness of different types of incentive schemes to promote whistle-blowing could be undermined by the presence of close working relationships likely to be forged among team members in audit firms and other organizations. Furthermore, the current incentive system in the auditing profession is dominated by penalties; however, many are calling for a shift toward incorporating more ways to reward auditors rather than penalize them, suggesting the importance of understanding the implications of alternative incentive systems. Also, there has not been much research done on the effectiveness of punitive schemes, despite their prevalence in the profession. Finally, whistle-blowing has been found to be a significant means by which frauds and other forms of misconduct are detected, which suggests the crucial importance of understanding factors that could enhance or undermine its effectiveness. 

The authors conduct an experiment involving 90 auditors from a Big 4 firm in Singapore. The participants are presented with a hypothetical scenario in which an audit manager encountered a wrongdoing by the engagement partner who allowed the client to materially misstate sales revenue, and assess their propensity to report the act through the firm’s whistle-blowing hotline after making no headway despite having voiced concerns to the partner. 

• The authors find that a rewarding incentive scheme, relative to the control group, increases auditors’ whistle-blowing propensity in the absence, but not in the presence, of a close working relationship.
• The authors find that a penalizing incentive scheme increases auditors’ whistle-blowing propensity regardless of the presence of a close working relationship.
• The authors find that auditors’ whistle blowing propensity is reduced by the presence of a close working relationship in the rewarding incentive scheme, but not in the penalizing incentive scheme or the control group. 

www.auditingresearchsummaries.org

The study contributes by contending and showing that for fraudulent financial reporting, reporting intentions to different internal report recipients are influenced by a particular situational antecedent: unsuccessful social confrontation. The authors believe that the research and related findings will be useful for audit committees and other senior executives concerned with the timely reporting of fraud. Such groups not only are responsible for establishing internal reporting channels, but also are responsible for training and communicating with employees about what to do should they discover wrongdoing such as fraud. The evidence on the effects of social confrontation on reporting intentions for two different internal report recipients should be helpful in training and communicating with employees regarding what to do in response to discovering fraud.

Kaplan, S. E., K. R. Pope, and J. A. Samuels. 2010. The Effect of Social Confrontation on Individuals' Intentions to Internally Report Fraud. Behavioral Research in Accounting 22 (2): 51-67.

Fraud is a serious social and economic problem that adversely affects a broad range of stakeholders, including audit committee and board members, top managers, employees, auditors, creditors, shareholders, and pensioners. In their 2006 Report to the Nation on Occupational Fraud and Abuse, The Association of Certified Fraud Examiners (ACFE) estimates annual fraud losses to be approximately $652 billion, approximately 5 percent of the annual revenues of all U.S. organization. Curtailing fraud, however, is a particularly challenging problem facing organizations. Detecting fraud is difficult because those engaging in fraud generally attempt to conceal their behavior, fraud is not a predictable event, and auditors often have limited experience detecting fraud.

The purpose of this paper is to report the results of an experimental study that provides evidence on the impact of an unsuccessful social confrontation with a supervisor, apparently engaging in fraud, on one’s reporting intentions to two different, legitimate internal report recipients.

The experiment involved a 2 x 2 design. Participants were evening M.B.A. students from a major university. A total of 96 participants completed the instrument. Among these participants, the mean age was 28.1 years, and mean work experience was over six years. Two-thirds of the participants were male. The evidence was gathered prior to September 2010.  

The findings indicate that participants’ reporting intentions were jointly influenced by social confrontation and the reporting channel. Specifically, reporting intentions to the supervisor’s supervisor were stronger than reporting intentions to the internal auditor following an unsuccessful social confrontation with the transgressor. In contrast, participants’ reporting intentions to the supervisor’s supervisor were not stronger than reporting intentions to the internal auditor when social confrontation had not occurred. This pattern was also observed when controlling for social desirability bias. Further, the effect of social confrontation on reporting intentions did not vary across the two different fraudulent acts. The results, based on two different fraudulent acts, allow the authors to generalize beyond a hypothetical study that included only one fraudulent act. Overall, the authors view the results as consistent with participants increasing their consideration of the report recipient’s power as the witness' exposure to risk increased. That is, following an unsuccessful social confrontation with the transgressor, the witness lost anonymity, which also increased the witness’ exposure to risk and potential retaliation from the transgressor. Further, the results suggest that increasing one’s emphasis on the report recipient’s power following an unsuccessful social confrontation may extend to various kinds of fraud.

http://www.auditingresearchsummaries.org

The results of this study are important for audit firms to consider when designing their ethics and whistleblowing policies. The evidence indicates that auditors’ are sensitive to power distance, and while no main effect for prior organizational response was found, prior research suggests that there are other costs associated with the perception that a firm does not respond to reports of ethical violations. Furthermore, it indicates that gender plays a role in an auditor’s sensitivity to power distance, and that the perceived moral intensity of the violation, which influences reporting likelihood, is moderated by the position of the observer, relative to the perpetrator. The study highlights the importance of firm culture and the implementation and enforcement of effective whistleblowing and ethical polices on the likelihood of employees to report observed ethical violations. 

For more information on this study, please contact Eileen Z. Taylor.

Taylor, E. Z., and M. B. Curtis. 2013. Whistleblowing in Audit Firms: Organizational Response and Power Distance. Behavioral Research in Accounting 25 (2): 21-43

Employee fraud is a threat to all organizations, and whistleblowing is the most common way these frauds are detected. This paper investigates whether two factors, prior organizational response and power distance, affect auditors’ likelihood to report observations of colleagues’ unethical behavior. Prior organizational response (to whistleblowing reports) should result in a greater reporting likelihood, since evidence from practice and research indicates that a whistleblower’s primary goal is to stop the unethical behavior from continuing. Organizations that historically pay attention to whistleblowing reports should give potential whistleblowers the confidence that their report will be effective. Power distance, the level of the perpetrator in relation to the level of the potential whistleblower (peer or superior), is also likely important, as employees may be reluctant to whistleblow on someone of higher rank.

The authors hypothesize that whistleblowing likelihood will be positively associated organization responsiveness to prior reports and that such likelihood is also associated with the relative position of the observer—individuals are more likely to report on peers than on superiors. They also investigate whether gender of the observer (potential whistleblower) matters, in relation to power distance, hypothesizing that females are more sensitive to power distance than are males.    

One hundred and eight audit seniors from Big-4 firms completed an experimental survey in Fall 2009. All participants read the same vignette of an ethical dilemma they observed within their firm, with modifications made for the different treatments. In the “responsive organization treatment”, participants were told that in the past, when the organization received a whistleblower report, they had taken appropriate action, whereas in the “nonresponsive treatment”, participants were told that in the past, when the organization received a whistleblower report, they had not taken appropriate action. To examine power distance, in the vignette, the perpetrator was referred to either as a “manager” (superior) or as a “fellow in-charge” (peer). The unethical behavior entailed observing the perpetrator destroy a page of review comments without addressing them.

After reading the vignette, participants rated the seriousness of the unethical behavior and their responsibility to report it, as a measure of moral intensity. In order to assess whistleblowing likelihood, participants also rated how likely they were to report the violation to the employee hotline, using a scale of 0 to 100, if (1) your identity could be protected, and (2) your report could be anonymous

• The authors find that auditors in this study were sensitive to power distance, such that they were significantly more likely to whistleblow on their peers than on their superiors. 
• Additionally, the authors find that power distance and prior organizational response interact, such that auditors are were more likely to report on their peers when the organization’s prior response was weak or negative, than when it was responsive. However, auditors were less likely to report superiors when the organization’s prior response was weak or negative, than when it was responsive.
• The authors find that men appear relatively less sensitive to power distance than do women.
• The authors find that the perceived moral intensity of the case is significantly related to reporting likelihood, and that power distance moderates the effect such that those with a lower perception of moral intensity are much more influenced by power distance.

http://www.auditingresearchsummaries.org