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    Whistleblowing in Audit Firms: Organizational Response and...
    research summary posted December 1, 2014 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting 
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    Title:
    Whistleblowing in Audit Firms: Organizational Response and Power Distance
    Practical Implications:

    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.

    Citation:

    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

    Keywords:
    Whistleblowing; ethical dilemma; power distance; gender
    Purpose of the Study:

    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.    

    Design/Method/ Approach:

    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

    Findings:
    • 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.
    Category:
    Governance, Independence & Ethics
    Sub-category:
    Internal auditor role and involvement in controls and reporting, Reporting Ethics Breaches - Self & Others