How to Wet the Whistle

Corporate whistleblowers might need a monetary nudge, researchers suggest.

By Jim Hyatt

For a working paper for the National Bureau of Economic Research, “Who Blows the Whistle on Corporate Fraud?,” Alexander Dyck, Adair Morse and Luigi Zingales studied 230 cases of alleged corporate fraud at larger companies between 1996 and 2004 (www.nber.org/papers/w12882).

Fraud allegations came from all sorts of sources but, before Sarbanes-Oxley (SOX) regulation, only about 35 percent of the cases came from entities designated to make such inquiries—regulators, auditors and the SEC. After SOX, the figure rose to slightly more than 50 percent, mainly reflecting a sharp increase in activity by auditors.

SOX also sought to encourage whistleblowers by establishing procedures to submit information anonymously and providing protection for employees against being fired for coming forward with such information. But despite increased incentives, the study found employee whistleblowing occurred in approximately 15.6 percent of the post-SOX cases, a decrease from 20.7 percent before the law.

The authors note that whistleblowing is risky—in 82 percent of the cases where employees were named, they alleged they were fired, quit under duress or “had significantly altered responsibilities” as a result.

One solution: adopting a system of rewards for reporting corporate fraud similar to the federal False Claims Act, under which a person filing evidence of a false claim against the government can recover 15 to 30 percent of the amount recovered. The authors note that almost 47 percent of the false claims filed against the healthcare industry are brought by employees.