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    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 
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    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