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  • Jennifer M Mueller-Phillips
    An Examination of the Effects of Managerial Procedural...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    An Examination of the Effects of Managerial Procedural Safeguards, Managerial Likeability, and Type of Fraudulent Act on Intentions to Report Fraud to a Manager.
    Practical Implications:

    This study provides evidence that whistleblowers take report recipient individual differences (i.e., managerial likeability) into account when making reporting decisions. In addition, this is despite that fact that, eventually, the investigation and resolution will involve multiple organizational members. Further, the results highlight the benefits of managerial likeability: employees have higher reporting intentions when faced with a likeable manager than one who is unlikeable.

    Secondly, this study finds that employees have higher reporting intentions when the fraud involves misappropriation of assets as opposed to fraudulent financial reporting, possibly because employees see fraudulent financial reporting as benefiting the organization as a whole, while misappropriation of assets benefits a single employee to the detriment of the organization.

    Finally, the authors suggest that findings indicating that the strength of managerial procedural safeguards to not influence reporting intent could be a result of poor manipulations and need to be further investigated.

    Citation:

    Kaplan, S. E., K. R. Pope, and J. A. Samuels. 2015. An Examination of the Effects of Managerial Procedural Safeguards, Managerial Likeability, and Type of Fraudulent Act on Intentions to Report Fraud to a Manager. Behavioral Research in Accounting 27 (2): 77-94.

    Keywords:
    managerial procedural safeguards, managerial likeability, fraud, reporting intentions
    Purpose of the Study:

    Because only a fraction of employees who discover fraud actually report it, the authors endeavor to obtain a better understanding of factors influencing individuals' intentions to report fraud, particularly to a non-anonymous recipient such as a manager (as opposed to an anonymous recipient, such as a hotline). The authors predict that reporting intentions to a manager will be influenced by 3 factors:

    • Attributes of the firm (i.e., strong managerial procedural safeguards will result in stronger reporting intentions than will weak managerial procedural safeguards)
    • Report recipient (i.e., a likeable manager will result in stronger reporting intentions than will an unlikeable manager)  
    • Type of fraud (i.e., managers are more likely to report misappropriation of assets than fraudulent financial reporting)

    Results indicate that managerial likeability and the type of fraud, but not managerial procedural safeguards or the interaction with managerial likeability, significantly influence reporting intentions to a manager.

    The authors contend that participants are influenced by managerial likeability because it provides specific information about the manager and acts as a signal about how the manager will likely handle a fraud report. In addition, these results suggest that participants make stronger attributions to a person engaging in misappropriation of assets compared to a person engaging in fraudulent financial reporting.

    Design/Method/ Approach:

    The authors execute a 2 x 2 x 2 between-subjects experiment, engaging 171 professional accountants and managers and randomly assigning each to one of eight experimental conditions. Participants had an average of over 26 years of work experience and almost half (47.5%) reported having had discovered a person of greater authority than themselves engaging in questionable or wrongful behavior. Participants were presented with a scenario in which an employee identifies an apparent fraudulent act by his immediate supervisor and asked about their intentions to report the fraud to a manager.

    Findings:
    • Attributes of the firm: Findings do not indicate that variances in managerial procedural safeguards (strong or weak) impact participant intention to report a fraud.
    • Report recipient: Findings indicate that reporting intentions were significantly higher when the manager was described as likeable (as opposed to unlikeable).
      • The authors suggest that this is because likeable managers are perceived as being more approachable, and will be expected to perform well as a recipient of a fraud report.
    • Type of fraud: Findings indicate that participants have significantly higher reporting intentions when the fraud involves a misappropriation of assets (i.e., employees taking company assets) versus when the fraud involved fraudulent financial reporting (i.e., misreporting financial results or financial position).
      • This, the authors posit, is because misappropriation of assets is seen as benefiting the employee only at the expense of the company and its shareholders, while fraudulent financial reporting might be seen as benefiting the company.
    Category:
    Corporate Matters, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Corporate Whistle Blowers, Fraud Risk Assessment
  • Jennifer M Mueller-Phillips
    Effects of Incentive Scheme and Working Relationship on...
    research summary posted January 12, 2017 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    Effects of Incentive Scheme and Working Relationship on Whistle-Blowing in an Audit Setting
    Practical Implications:

    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. 

    Citation:

    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. 

    Keywords:
    reward and penalty, incentive scheme, working relationship, and whistle-blowing.
    Purpose of the Study:

    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. 

    Design/Method/ Approach:

    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. 

    Findings:
    • 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. 
    Category:
    Corporate Matters, Independence & Ethics
    Sub-category:
    Corporate Whistle Blowers, Reporting Ethics Breaches - Self & Others
  • Jennifer M Mueller-Phillips
    The Effect of Evidence Strength and Internal Rewards on...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    The Effect of Evidence Strength and Internal Rewards on Intentions to Report Fraud in the Dodd-Frank Regulatory Environment
    Practical Implications:
    • These experimental findings suggest that employees may not bypass internal reporting outlets (such as hotlines), despite the incentive provisions enacted by the Dodd-Frank Act, which encourage employees to report information regarding violations of relevant securities laws to the SEC. This finding should be of interest to audit committees and management as it suggests that the internal hotlines developed under SOX remain a viable resource for identifying wrongful behavior within organizations.
    • Rather than adding a motivation for internal reporting, a monetary incentive may replace or crowd out intrinsic motivations, such as moral or ethical motivations, and offer a different motivation for internal reporting. Thus, the introduction of a monetary incentive for internal whistleblowing may not increase employees’ likelihood of blowing the whistle internally. Therefore, audit committees and management may wish to carefully consider whether offering an internal reward will have the desired effect. It may be more prudent to dedicate resources toward actions that will strengthen intrinsic motivations for internal whistleblowing, such as emphasizing employees’ ethical obligation to report internally and highlighting the benefits to the organization when employees report internally rather than externally.

    For more information on this study, please contact Alisa G. Brink. 

    Citation:

    Brink, A. G., D. J. Lowe, and L. M. Victoravich. 2013. The effect of evidence strength and internal rewards on intentions to report fraud in the Dodd-Frank regulatory environment. Auditing: A Journal of Practice & Theory 32 (3): 87-104.

    Keywords:
    Fraud; whistleblowing; Dodd-Frank Act; Sarbanes-Oxley Act; SEC; rewards; motivational crowding.
    Purpose of the Study:

    There are many unanswered questions and concerns regarding the consequences of the fraud whistleblowing environment created by the Sarbanes-Oxley (SOX) and Dodd-Frank Acts. While SOX requires audit committees to implement anonymous internal reporting channels, the Dodd-Frank Act offers substantial monetary incentives that encourage reporting to the Securities and Exchange Commission (SEC). To mitigate concerns that employees might bypass internal channels, some companies are considering offering internal whistleblowing incentives. The purpose of this study is to experimentally examine the effect of monetary incentives offered by companies to encourage internal whistleblowing in the new regulatory environment established by SOX and the Dodd-Frank Act. Further, we investigate the impact of evidence strength (strong or weak) on reporting intentions to internal and external channels in the presence and absence of such internal reporting incentives. 

    Design/Method/ Approach:
    • An experiment was conducted at two large public universities during the latter part of 2011.
    • The experiment consisted of a case describing a controller who discovered evidence indicating that his superior, the CFO, engaged in fraudulent financial reporting. Two variables were manipulated between participants, resulting in four different scenarios. The manipulated variables were the presence of an internal whistleblowing incentive (present or absent) and strength of evidence indicating that the CFO had engaged in the fraudulent act (strong or weak). Participants indicated the likelihood of reporting this act (1) directly to the SEC, and (2) through an internal reporting hotline.
    • Participants were evening and executive M.B.A. students with an average age of 33 years and about 11 years of professional work experience.
    Findings:

    The results from the experiment suggest that:

    • Participants’ reports of fraudulent financial reporting to internal channels are likely to exceed reports to the SEC regardless of whether there is an internal incentive or strong evidence of wrongdoing.
    • Participants indicated that if they were to report both internally and externally, they would report through the internal hotline first.
    • The impact of an internally offered financial incentive on SEC reporting intentions depends on the strength of evidence supporting the claim.
      • When evidence is weak, an internal incentive decreases the likelihood that employees will report to the SEC.
      • When evidence is strong, the presence of an internal incentive increases the likelihood of external reporting.
    Category:
    Corporate Matters, Independence & Ethics
    Sub-category:
    Corporate Whistle Blowers, Reporting Ethics Breaches - Self & Others
  • Jennifer M Mueller-Phillips
    The influence of organizational justice on accountant...
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    The influence of organizational justice on accountant whistleblowing.
    Practical Implications:

    This research study makes important contributions to the literature and has implications for management intent on designing structural mechanisms that are effective in promoting whistleblowing. First, the results suggest that whistleblowing policies and procedures, as well as related supervisor exchanges with employees, that are consistent with the dimensions of organizational justice may positively impact the likelihood that organizational accountants will report potential incidents of financial statement fraud. Second, the authors limited the sample to management accountants and internal auditors because these are the organizational accountants who are likely to have early knowledge of financial statement fraud, and minimizing the costs of financial statement fraud requires timely disclosure. Organizational accountants can effectively act as corporate fraud sentinels, and the results of this study contribute to the understanding of how accountants may be motivated to disclose fraud. Third, by framing the discussion under the rewards, anti-retaliation, and structural legislative models, the authors provide accounting researchers with a framework for guiding their thinking about whistleblowing.

    Citation:

    Seifert, D. L., J. T. Sweeney, J. Joireman, and J. M. Thornton. 2010. The influence of organizational justice on accountant whistleblowing. Accounting, Organizations & Society 35 (7): 707-717.

    Keywords:
    organizational justice, whistleblowing, whistleblowers, business ethics, internal auditors, financial statements, distributive justice
    Purpose of the Study:

    In the preceding decade, the enormous economic and social costs of financial statement fraud has shaken markets, devastated investment portfolios, and reduced confidence in financial reporting. Many of these frauds were revealed not by external auditors or analysts, but by the disclosures of employees who were privy to accounting information. As a consequence, regulators worldwide have recognized the importance of whistleblowing in both deterring and detecting financial malfeasance, and have instituted legislation intended to promote employee reporting of corporate fraud.

    A core assumption of much of this legislation, such as the Sarbanes-Oxley Act in the United States, is that well-designed structural mechanisms can be influential in motivating whistleblowing. The authors test this proposition by applying the tenets of organizational justice to the construction of whistleblowing policies and procedures. In a between-subjects experiment, the authors manipulate two levels (high/low) of the procedural, interactional, and distributive fairness dimensions of organizational whistleblowing across eight case scenarios involving financial statement fraud.

    Design/Method/ Approach:

    The final sample of 447 subjects represents 17% of the experimental instruments distributed to IIA and IMA chapters in the United States. The final sample consists of 232 internal auditors and 215 management accountants. The internal auditor group averaging 19 years of professional work experience, and the management accountants’ averaging almost 21 years. Over 58% of the participants were in either supervisory, management, or executive positions. 49% reported that they had previously disclosed some type of wrongdoing within their organization. This data was gathered prior to 2010.

    Findings:

    The results indicate that when organizational policies and procedures for whistleblowing are designed to incorporate the dimensions of fairness or justice, organizational accountants perceive a higher likelihood that financial statement fraud will be disclosed by a whistleblower. The authors found that higher levels of procedural justice, interactional justice, and distributive justice each significantly increase the perceived likelihood of whistleblowing. The results also reveal a main effect for gender, with female organizational accountants perceiving a higher likelihood of employee disclosure of financial statement fraud.

    The results of the study are important because they suggest that management can take actions that may positively impact the likelihood that organizational accountants will report financial statement fraud. The results of this study indicate that fair policies and procedures may increase the likelihood of whistleblowing; however, the establishment of formal mechanisms for reporting misconduct does not guarantee an environment that encourages whistleblowing. To be effective in promoting whistleblowing, the results indicate that employees must perceive that the procedures in place are fair and reasonable, that management is supportive of whistleblowing, and that management will take appropriate action in resolving the alleged misconduct.

    Category:
    Corporate Matters
    Sub-category:
    Corporate Whistle Blowers
  • Jennifer M Mueller-Phillips
    Under Which Conditions are Whistleblowing “Best P...
    research summary posted December 1, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    Under Which Conditions are Whistleblowing “Best Practices” Best?
    Practical Implications:

    The authors’ results suggest that an external reporting channel may overcome an organization’s history of poor responsiveness to whistleblowing as well as decrease the reticence of less proactive individuals to report.  The external anonymous channel thus achieves higher reporting intentions in instances of perceived past negative outcomes of a non-anonymous internal channel and among individuals who by personal trait are less likely to report. Although, the study does not address the likely incremental costs of an external channel, its results suggest no advantage to incurring such additional costs when employees perceive a situation with past positive outcomes.

    For more information on this study, please contact Jian Zhang.

    Citation:

    Zhang, J., K. Pany and P. M. J. Reckers.  2013. Under which conditions are whistleblowing “best practices” best? Auditing: A Journal of Practice and Theory 32(3): 171-181.

    Keywords:
    fraudulent financial reporting; anonymous reporting channel; proactivity; whistleblowing.
    Purpose of the Study:

    Public companies are required by the Sarbanes-Oxley Act of 2002 to establish an anonymous reporting (whistleblowing) channel for employee reporting of questionable accounting practices.  Corporate audit committees are provided flexibility in implementing this requirement and a controversial choice is the type of reporting channel.  The purpose of the study is to examine the efficacy of externally administered versus internally administered channels.

    Use of an externally administered hotline generally has been considered a “best hotline practice” in that it is likely to lessen the reporter’s hesitation to become involved. That is, arguably, an externally administered hotline is perceived to provide a heightened likelihood of action and favorable outcome, including a reduced likelihood of whistleblower detection through greater confidentiality. This is consistent with tenants of the theory of planned behavior.  Nonetheless, this topic is controversial because such externally administered hotlines are not cost free and because some suggest that there may be a general hesitancy on the part of some individuals to report externally. 

    Design/Method/ Approach:

    The study’s participants, 130 MBA students with an average of nine years work experience, responded to differing forms of a research instrument which systematically manipulates the administrator of an anonymous reporting channel (internal vs. external), and the company’s previous whistleblowing outcomes (positive or negative to the previous non-anonymous whistleblower). The research instrument describes a current fraudulent act that violates GAAP revenue recognition principles and asks respondents about the likelihood that they would report the act.

    Findings:
    • The authors find that the preference for external whistleblowing channels may be conditional upon the perceived lack of past success of internal channels to produce good outcomes and an employee overall proactivity characteristic.
    • The authors find that the external anonymous channel achieves higher reporting intentions in instances of perceived past negative outcomes of a non-anonymous internal channel, but not when past outcomes had been positive to a whistleblower.
    • The authors find that highly proactive participants (as measured by a frequently used scale) were not influenced by the reporting channel, whereas less proactive participants reported a greater likelihood of reporting to an externally administered hotline.
    Category:
    Corporate Matters, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Corporate Whistle Blowers, Fraud Risk Assessment
  • Jennifer M Mueller-Phillips
    When do employers benefit from offering workers a financial...
    research summary posted February 20, 2017 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    When do employers benefit from offering workers a financial reward for reporting internal misconduct?
    Practical Implications:

    This study helps to clarify the conditions under which employers are most likely to benefit economically from offering their workers an explicit financial reward for reporting internal misconduct. His cost-benefit analysis reveals that offering a financial reward is likely to be most cost-effective when the existing rate of whistleblowing within the firm is low and least-cost effective when it is high. Furthermore, employers who pay relatively low wages and/or whose workers have weak ethical incentives to report internal misconduct are likely to gain the most economic benefit from offering a reward. 

    Citation:

    Stikeleather, B. R. 2016. When do employers benefit from offering workers a financial reward for reporting internal misconduct? Accounting, Organizations and Society 52: 1 – 14. 

    Keywords:
    whistleblowing, reward, employee misconduct, gift wage, experimental economics
    Purpose of the Study:

    Many employers incur significant economic losses from internal misconduct, such as stealing inventory, falsifying time records, or operating equipment under the influence of drugs or alcohol. As a result, employers are attempting to find a solution to combat this misconduct. One solution that has arisen is offering workers an explicit financial reward for reporting internal misconduct; however, no consensus exists on whether or when this approach should be used. This study seeks to clarify the matter by identifying organizational factors that help determine whether an employer will benefit from offering workers a financial reward for reporting internal misconduct. Specifically, the author investigates whether the level of workers’ fixed compensation and their moral convictions influence their whistleblowing decisions and whether variation in these two key organizational factors moderates the cost-effectiveness for offering financial rewards for internal whistleblowing. 

    Design/Method/ Approach:

    To test his hypothesis, the author runs an experiment consisting of three between-subjects conditions.

    Findings:
    • The author finds that workers who observed theft blew the whistle more frequently as their fixed wage increased and as their conviction increased that employees in the workplace have a moral obligation to report internal misconduct to their employer.
    • The author finds that offering a reward had an overall positive economic effect on employer payoffs; however, he also finds that the positive difference in employer payoffs decreases as the level of wages paid to workers increases to the point that employers who offered relatively high wages obtained statistically similar payoffs in both conditions.
    • The author finds that the positive difference in employer payoffs decreases as workers report having stronger convictions that employees have a moral obligation to report internal misconduct; thus, the economic benefit of offering a reward accrues primarily to employers who offer relatively low pay and whose workers have weak moral convictions about reporting internal misconduct. 
    Category:
    Corporate Matters
    Sub-category:
    Corporate Whistle Blowers
  • Jennifer M Mueller-Phillips
    Whistleblowing in Audit Firms: Do Explicit Protections from...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    Whistleblowing in Audit Firms: Do Explicit Protections from Retaliation Activate Implicit Threats of Reprisal?
    Practical Implications:

    This experiment illustrates the fact that organizations should carefully craft their whistleblower hotline policies so as to minimize the salience of retaliation risk. For example, instead of describing explicit protections from retaliation, the organization could explicitly describe the its commitment to ethical behavior. Furthermore, organizations may wish to publicize successful instances of employee whistleblowing as a means of increasing the availability of instances in which whistleblower retaliation did not occur.

    Citation:

    Wainberg, J. and S. Perreault. 2016. Whistleblowing in Audit Firms: Do Explicit Protections from Retaliation Activate Implicit Threats of Reprisal? Behavioral Research in Accounting 28 (1): 83-93. 

    Keywords:
    whistleblowing, corporate governance, vividness congruency theory
    Purpose of the Study:

    Whistleblower hotlines are becoming increasingly important in audit firms since auditors are generally viewed as the first line of defense against corporate malfeasance; however, surveys consistently indicate that a substantial number of employees who witness misconduct still choose not to report. Workplace retaliation is the primary reason that individuals are fearful of reporting any wrongdoing that they witness. This is not an irrational fear, as there have been numerous well-publicized examples of lives and careers that have been irreparably damaged as a result of whistleblower retaliation. Consequently, the Association of Certified Fraud Examiners has begun recommending that organizations specifically emphasize anti-retaliation protections offered to employees in addition to basic assurances of confidentiality and anonymity. These specific protections are intended to encourage whistleblowing reporting, but the vividness congruency theory suggests that the inclusion of these protections in whistleblower hotline descriptions may actually inhibit such reporting due to the fact that such explicit protections may activate fearful imagery that is incongruent with the message of protection being offered. 

    Design/Method/ Approach:

    The authors created an experiment in which graduate level students enrolled in an auditing course participated.  

    Findings:
    • The authors find that the inclusion of explicit protections from specific forms of retaliation can lead to an increase in the salience of such threats, thereby significantly lowering the likelihood that the misconduct will be reported through whistleblower hotlines.
    • The authors find that, rather than diminishing the fear of retaliation, auditors’ perceptions of reporting risk were intensified by the presence of explicit protections in the hotline policy. 
    Category:
    Corporate Matters, Independence & Ethics
    Sub-category:
    Corporate Whistle Blowers, Reporting Ethics Breaches - Self & Others

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