J Bus Ethics (2012) 106:213–227 DOI 10.1007/s10551-011-0990-y
The Effects of Contextual and Wrongdoing Attributes on Organizational Employees’ Whistleblowing Intentions Following Fraud Shani N. Robinson • Jesse C. Robertson Mary B. Curtis
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Received: 16 November 2010 / Accepted: 1 August 2011 / Published online: 14 August 2011 Ó Springer Science+Business Media B.V. 2011
Abstract Recent financial fraud legislation such as the Dodd–Frank Act and the Sarbanes–Oxley Act (U.S. House of Representatives, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, [H.R. 4173], 2010; U.S. House of Representatives, The Sarbanes–Oxley Act of 2002, Public Law 107-204 [H.R. 3763], 2002) relies heavily on whistleblowers for enforcement, and offers protection and incentives for whistleblowers. However, little is known about many aspects of the whistleblowing decision, especially the effects of contextual and wrongdoing attributes on organizational members’ willingness to report fraud. We extend the ethics literature by experimentally investigating how the nature of the wrongdoing and the awareness of those surrounding the whistleblower can influence whistleblowing. As predicted, we find that employees are less likely to report: (1) financial statement fraud than theft; (2) immaterial than material financial statement fraud; (3) when the wrongdoer is aware that the potential whistleblower has knowledge of the fraud; and (4) when others in addition to the wrongdoer are not aware of the fraud. Our findings extend whistleblowing research in several ways. For instance, prior research provides little
S. N. Robinson Department of Accounting, College of Business Administration, Sam Houston State University, SHSU Box 2056, Huntsville, TX 77341-2056, USA e-mail:
[email protected] J. C. Robertson (&) M. B. Curtis Department of Accounting, College of Business, University of North Texas, 1155 Union Circle, #305219, Denton, TX 76203, USA e-mail:
[email protected] M. B. Curtis e-mail:
[email protected]
evidence concerning the effects of fraud type, wrongdoer awareness, and others’ awareness on whistleblowing intentions. We also provide evidence that whistleblowing settings represent an exception to the well-accepted theory of diffusion of responsibility. Our participants are professionals who represent the likely pool of potential whistleblowers in organizations. Keywords Context Diffusion of responsibility Fraud Fraud type Whistleblowing
Introduction The Association of Certified Fraud Examiners’ (ACFE) 2010 Report to the Nations on Occupational Fraud and Abuse reports that the cost of fraud to organizations is extensive—5% of annual revenues. This cost, if applied to Gross World Product, suggests worldwide annual fraud loss of approximately $2.9 trillion (ACFE 2010, p. 4).1 However, one difficulty in detecting fraud is that it often is observed by only one or a small number of individuals and may evade existing internal controls; thus, organizational members represent a valuable control resource that can help minimize fraud through whistleblowing (Kaplan et al. 2010; Trevino and Victor 1992). Indeed, the ACFE survey (2010, p. 5) found that whistleblowing is the single most common method of fraud detection.
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The ACFE is a U.S.-based organization that researches fraud in organizational settings and provides anti-fraud resources and training. More details are available on the organization’s website (http://www.acfe.com).
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Unfortunately, not all observed fraud is reported and many frauds are reported only after significant time has elapsed. Whistleblowing decision models (c.f., Miceli et al. 2008) suggest that employees evaluate characteristics of the context in which fraud occurs to determine whether observed misbehavior warrants reporting. However, contextual characteristics that might signal fraud to an expert such as a forensic accountant may be the very characteristics that discourage reports by potential whistleblowers. Furthermore, prior experimental research and meta-analyses indicate that characteristics of the wrongdoing itself, such as seriousness, also can influence whistleblowing (Miceli et al. 2008; Mesmer-Magnus and Viswesvaran 2005). Given that organizations rely on employees to report fraud, it is important to advance the understanding of the influence of context on whistleblowing intentions (i.e., the likelihood employees will report wrongdoing to a person in position to take action). Therefore, we investigate the effects of characteristics of both the fraud itself and the organizational context in which it occurs on employees’ whistleblowing intentions. The characteristics of the wrongdoing we consider are the type of fraud (financial statement fraud or theft) and materiality of the financial statement fraud.2 The contextual factors we investigate are the wrongdoer’s awareness of the potential whistleblower’s knowledge of the fraud, and whether others in addition to the whistleblower and wrongdoer have knowledge of the fraud. Through our manipulations, we make three primary contributions to the whistleblowing literature. First, few studies investigate differences in whistleblowing for different types of fraud. Indeed, Near et al. (2004) specifically called for more research on the relationship between the type of fraud and whistleblowing intentions. We provide evidence concerning whether organizational employees are more likely to report theft or financial statement fraud, two prominent types of fraud as defined by both the ACFE (2010) and accounting standards setters (e.g., AICPA 2002). Developing an understanding of this issue is critical because organizational leaders have incentives to stop both forms of fraud, as theft occurs more frequently, while financial statement fraud often takes longer to detect and causes greater monetary loss (ACFE 2010, p. 4). Thus, financial statement fraud tends to have a greater impact on society and capital markets than theft. Using attribution theory, we predict employees will be less likely to report 2
Our classification of wrongdoing and contextual characteristics is similar to that of prior research (e.g., Mesmer-Magnus and Viswesvaran 2005) and standards such as Statement on Auditing Standards (SAS) No. 99. In the U.S., SAS No. 99 is the current standard that describes the auditor’s responsibilities with respect to fraud detection, common fraudulent financial reporting and theft schemes, and conditions that can lead to fraud (AICPA 2002).
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financial statement fraud than theft. Based on prior research, we also predict that the materiality of financial statement fraud will be positively associated with whistleblowing intentions. Second, as with different fraud types, prior research is limited concerning the effects of the wrongdoer’s awareness of the potential whistleblower’s knowledge of the fraud on reporting intentions. Drawing on whistleblowing literature concerning retaliation, we predict whistleblowing is less likely when the wrongdoer is aware of the potential whistleblower’s knowledge of the fraud. Third, prior research provides little evidence concerning the awareness that other potential observers may possess about the wrongdoing, in addition to that of the wrongdoer and the potential whistleblower, on reporting intentions. While psychology theory on diffusion of responsibility and the bystander effect (e.g., Darley and Latane 1968; Manning et al. 2007) suggests individuals are more likely to act as the number of observers decreases, we believe a parallel effect on whistleblowing is unlikely because of unique circumstances surrounding reporting fraud. Accordingly, we predict employees are less likely to report fraud when they are the only person in addition to the wrongdoer who is aware of the fraud, than if others are aware. Consistent with our hypotheses, experimental results indicate that employees are less likely to report: (1) financial statement fraud than theft; (2) immaterial fraud than material fraud; (3) when the wrongdoer is aware that the employee has knowledge of the fraud; and (4) when others are not aware of the fraud than when others are aware. These results could facilitate ethics training within organizations and motivate policy changes. For example, our finding that employees are more willing to report theft than financial statement fraud is especially troubling given that financial statement fraud can have serious consequences for society and capital markets. Organizations could consider initiating training programs to help employees understand the potentially severe repercussions of financial statement fraud. Our results concerning the wrongdoer’s and others’ awareness of fraud also could serve as the impetus for training. Clearly, financial statement fraud and theft are in violation of various ethical standards, professional codes of conduct, and laws. Therefore, employees should report wrongdoing regardless of who else happens to be aware of the situation. Training to reinforce the importance of reporting fraud and strengthening of organizational penalties against retaliation may increase reporting. We organize the remainder of this paper as follows. The second section develops our hypotheses, the third section describes our research method, and the fourth section presents results. The fifth section closes with our conclusions.
The Effects of Contextual and Wrongdoing Attributes on Whistleblowing
Background and Hypotheses Background Consistent with prior research, we define whistleblowing as reporting illegal or immoral acts to a person with the ability to take corrective action to address the wrongdoing (e.g., Grant 2002; Miceli et al. 1991). The extant literature provides evidence of multiple factors that can influence whistleblowing intentions (for reviews, please refer to Grant 2002; Gundlach et al. 2003; Hooks et al. 1994; Miceli et al. 2008; Near and Miceli 1995). As noted in the ‘‘Introduction’’ section, we extend this literature in several ways through our manipulations. In the remainder of this section, we discuss literature specifically related to our hypotheses.
Type of Fraud We first consider the type of fraud as a predictor of whistleblowing intentions. We draw from social psychology and whistleblowing research on causal reasoning theory (i.e., attribution theory) to develop our hypothesis concerning this contextual factor. Perceptions about causal attributions influence how individuals respond to events (Campbell and Martinko 1998; Fiske and Taylor 1984; Gundlach et al. 2003). Specifically, Martinko et al. (2002, p. 111) theorize that attributions for the cause of outcomes are most predictive of the nature and form of reactions to those outcomes. Thus, whistleblowers’ decisions are influenced by their attribution about the causes of the observed wrongdoing. Further, they assert that ‘‘for an individual to hold another party responsible for an outcome, the individual must perceive that the outcome was due to the other party’s internal characteristics and that the other party had control over the outcome.’’ This literature indicates that the assignment of causality is important in whistleblowing because observers who assign greater responsibility to the wrongdoer are more likely to report the behavior to a higher authority. The fundamental attribution error describes how individuals demonstrate bias in attributing causality for the behavior of others (as well as for themselves), by ascribing the reason for behavior or events (Harvey and Weary 1984). When explaining the actions of others, individuals tend to overconfidently assume that the observed behavior is due to the other person’s distinct character traits, overemphasizing these dispositional or personal factors at the expense of contextual factors that can influence behavior (Ross 1977). In other words, an observer of fraud has a tendency to blame the wrongdoer rather than any contextual factors (Harman 1999).
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However, certain types of fraud could serve as a stronger catalyst for attribution error than others, and therefore, influence whistleblowing. For instance, theft of company assets clearly reveals intent for personal gain, which should strengthen the ‘‘person’’ attribution (i.e., attribute greater responsibility for the unethical act to the wrongdoer) and increase the likelihood of whistleblowing. Conversely, misstating financial statements is often committed as a result of external influences and could appear to benefit the organization, since such actions might, at least in the shortterm, protect employees and stockholders from negative stock market reactions. Thus, relative to theft, financial statement fraud introduces a lower likelihood of attribution error because of these salient possibilities for contextual attributions because of organizational and environmental pressures to meet financial targets such as organizational goals and earnings forecasts.3 This shift to contextual attributions likely will result in employees being less likely to report financial statement fraud than theft. Prior whistleblowing literature has addressed the importance of attribution theories for predicting whistleblowing decisions, and leads to the same conclusion we derived above—that whistleblowing is more likely for theft than financial statement fraud. For example, Gundlach et al. (2003) described how potential whistleblowers’ beliefs about the causes of events influence whistleblowing intentions. Their Social Information Processing model of whistleblowing suggests that the wrongdoing leads to four potential characteristics of attributions that influence whistleblowing intentions: (1) internal versus external; (2) stable versus unstable; (3) controllable versus uncontrollable; and (4) intentional versus unintentional.4 We focus on the internal/external aspect of theft and financial statement fraud, as we believe this is the characteristic where differences will be most salient. Prior research indicates that the motivation for financial statement fraud often comes from sources that are external to the wrongdoer. These external pressures include the presence of corporate performance-based compensation (Efendi et al. 2007; Cheng and Warfield 2005), the sensitivity of stock options to stock price (Burns and Kedia 2006), and debt covenant restrictions (Efendi et al. 2007). Therefore, 3
We remind the reader of research, referenced earlier, that financial statement fraud typically causes greater financial loss than theft (ACFE 2010); it is, therefore, potentially highly costly to the organization, despite possible perceptions of short-term benefits to the organization. 4 Gundlach et al.’s (2003) model did not indicate a direct link between attributions and whistleblowing decisions, but rather suggests that both judgments of responsibility and emotions are mediators of the relationship between attributions and whistleblowing decision. Therefore, while the attribution component of their model is relevant for our discussion, we do not provide a direct test of all assertions made within their framework.
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organizational employees may have incentives from external sources to perpetrate financial statement fraud. On the other hand, observers of theft are unlikely to attribute motivation to external pressures as few organizations would directly or indirectly encourage employees to misappropriate assets for personal gains. While financial statement fraud can benefit both the employee and the organization, albeit often for a very short time before the fraud is detected, theft clearly provides no benefit to the organization, yet the wrongdoer can benefit. As such, theft more likely promotes causal attributions toward the wrongdoer, and financial statement fraud creates opportunities to shift some degree of blame away from the wrongdoer, leading to greater reporting of theft than financial statement fraud. In summary, the fundamental attribution error is more likely to occur for theft than financial statement fraud because of the perceived intent for personal gain involved with theft and the presence of salient external pressures for financial statement fraud, which carries the relatively salient possibility that the organization benefits (though any such benefit is likely short-term), increasing the likelihood that observers attribute financial fraud to contextual pressures. Therefore, potential whistleblowers are more likely to attribute theft to personal factors, and report the theft. This reasoning is consistent with Gundlach et al. (2003, p. 111), who noted that ‘‘individuals will be viewed as responsible for perceived wrongdoing when their actions are perceived to be driven by their own motives (internal rather than external causes)’’. In addition to this theoretical background, we searched the whistleblowing literature for studies that have examined the effect of fraud type on whistleblowing intentions. Unfortunately, evidence on this issue is limited. Near et al. (2004) surveyed federal workers to identify types of observed wrongdoing and reporting behaviors, and employed an inductive technique to derive an explanation for their findings. The authors found that whistleblowing is more likely following mismanagement (covering-up poor performance or making false performance forecasts), sexual harassment, and legal violations relative to theft, safety violations, and discrimination. However, their findings do not address differences in reporting theft and financial statement fraud.5 To address this gap in the literature, and
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to apply a theoretical grounding, we investigate differences in reporting intentions for financial statement fraud and theft. Applying attribution theory, we predict that whistleblowing is less likely to occur following financial statement fraud than theft, formally stated as: H1 Employees are less likely to report financial statement fraud than theft. Materiality of Wrongdoing Materiality thresholds are of key consideration in many business settings. For instance, professional standards instruct auditors to be concerned with matters that ‘‘either individually or in the aggregate, could be material to the financial statements’’ (AICPA 2006, paragraph 3).6 However, in the context of fraud, materiality is a difficult benchmark to apply because seemingly minor fraud may signal either other, larger fraud, or a fraud that may become more significant over time. Thus, the presence of immaterial fraud may be the ‘‘tip of the iceberg’’ for exposing more pervasive frauds (Wells 2003, p. 69). As such, frauds that fall below a materiality constraint are important occurrences that should be reported because their cumulative effects could have a large overall impact on the organization, or because that one fraud report may be the ‘‘loose thread’’ that leads to the unraveling of significant, hidden fraud. For these reasons, we are interested in potential differences in the reporting intentions of both large (material) and small (immaterial) misstatements. Although forensic investigators do not believe that materiality should dictate reporting intentions (Wells 2003), prior research suggests that individuals consider the significance or impact of a misbehavior and are, therefore, less inclined to report less material frauds. Moreover, while materiality has been investigated in prior whistleblowing research (in the form of seriousness), our study expands on this research and sheds light on the potential adverse consequences of the failure to report immaterial frauds. We investigate the relationship between seriousness and reporting intentions by comparing material and immaterial scenarios within the same type of fraud (financial statement fraud) to avoid potential confounds of individual perceptions of seriousness across different fraud types (Brennan
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Kaplan et al. (2010) manipulated type of fraud (financial statement fraud or theft) as part of their examination of the relationship between social confrontation and whistleblowing. Their study differs from ours in two important respects. First, Kaplan et al. (2010, p. 51) focused on social confrontation and included the two fraud types ‘‘to broaden the generalizability of the findings’’. They found that fraud type did not moderate the relationship between social confrontation and whistleblowing intentions. Second, the primary dependent measure used by Kaplan et al. (2010) is the difference in reporting intentions to the participant’s supervisor or to the internal auditing
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Footnote 5 continued department. Our focus is not on preferred report recipient, but on whistleblowing intentions in general. 6 SAS No. 107 guides auditors on the application of materiality (AICPA 2006). This standard indicates that auditors should not ignore quantitatively immaterial misstatements because they could, in aggregate, cause the financial statements to be materially misstated.
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and Kelley 2007).7 Given that the majority of whistleblowing research indicates that whistleblowing is more likely to occur as perceived seriousness of the wrongdoing increases (e.g., Hooks et al. 1994; Miceli and Near 1985; Taylor and Curtis 2010), we offer the following hypothesis:
knowledge of the wrongdoer’s role in the fraud.8 Accordingly, we propose the following hypothesis to predict that whistleblowing is less likely to occur when a wrongdoer is aware that the potential whistleblower has knowledge of the fraud:
H2 Employees are less likely to report immaterial financial statement fraud than material financial statement fraud.
H3 Employees are less likely to report fraud when the wrongdoer is aware that they have knowledge of the fraud than when the wrongdoer is not aware they have knowledge of the fraud.
Wrongdoer Awareness Prior literature suggests that the threat of retaliation reduces whistleblowing intentions (e.g., Mesmer-Magnus and Viswesvaran 2005). We extend this research by investigating whether a specific contextual variable, wrongdoer awareness of the potential whistleblower’s knowledge of fraud, influences whistleblowing intentions. Thus, our third hypothesis does not predict the relationship between retaliation and whistleblowing, but rather, we rely on this relationship as part of the hypothesis development. Retaliation against the whistleblower can include both antagonistic actions and intentional failure to take actions that would benefit the whistleblower (Miceli et al. 2008). In our setting, retaliation in either form is likely because we investigate a situation in which an individual learns that his/her supervisor has committed fraud. In such a context, the supervisor has the power to inflict harm through any number of methods, including poor performance evaluations or by withholding benefits such as promotions or favorable job assignments. According to Miceli et al. (2008), there is incentive, and often opportunity, for wrongdoers to retaliate against whistleblowers. Given that retaliation is unfortunately common after whistleblowing, potential whistleblowers likely have more fear of retaliation from a wrongdoer who possesses ex ante awareness that the whistleblower has knowledge of the fraud, and/or the whistleblower believes the wrongdoer will gain ex post knowledge of their identity. Our focus is on the former condition in which whistleblowers likely anticipate more retaliation from a wrongdoer who is aware that the whistleblower has
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Research employing seriousness as an independent variable tends to adopt a similar approach, eliciting perceptions of seriousness of a scenario’s unethical behavior (Brennan and Kelly 2007). These studies elicit perceived seriousness across various scenarios and across subjects, finding generally that perceptions of seriousness increase willingness to whistleblow. However, individuals have difficulty comparing the seriousness of differing types of fraud. Of greater concern are differences in perceived seriousness betweensubjects—one person’s serious infraction is another observer’s minor transgression. Therefore, a more direct test of the impact of seriousness on hotline use is the manipulation of seriousness within the experiment, rather than merely assessing individual perceptions of a given scenario.
Diffusion of Responsibility The final contextual variable we consider is whether persons other than the wrongdoer and the potential whistleblower are aware of the fraud. To develop this hypothesis, we begin with the theory of diffusion of responsibility, or the tendency for an individual to avoid taking action when others are aware of the situation because the individual does not have sole responsibility in such a context (Darley and Latane 1968). The classic example of diffusion of responsibility, and the alleged event that sparked research on the matter, is a story in which 38 individuals supposedly witnessed the murder of Kitty Genovese but took no action in response to the victim’s screams.9 Based on a close examination of the legal documentation surrounding the case, Manning et al. (2007) debunked the myth that so many people passively observed that murder, but also concluded that research on diffusion of responsibility, and its corollary, the bystander effect, support the psychological principles behind the myth.10 Specifically, Manning et al. (2007, p. 566) explained that ‘‘the bystander effect [based on diffusion of responsibility theory] has become
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While the wrongdoer might never definitively identify the whistleblower, the more important issue when examining whistleblowing intentions is the potential whistleblower’s perception of the likelihood that the wrongdoer might discover his/her identity. Indeed, even in the presence of ethics hotlines, employees are not always convinced that their identity will remain protected (Metropolitan Corporate Counsel 2005; Finn 1995). 9 The Kitty Genovese murder occurred on a New York City street in 1964. Multiple accounts of the details surrounding the murder suggest that 38 witnesses passively watched the murder from their homes for approximately 30 min. However, court transcripts and other evidence from the subsequent murder trial indicate that the story was embellished and that actual number of witnesses to the murder was much fewer than the 38. Yet, the story played an important role in stimulating psychology research into helping behavior and the diffusion of responsibility concept (Manning et al. 2007). 10 Darley and Latane (1968) defined the bystander effect as the tendency for individuals to choose not to help a victim of an undesirable event because others are also aware of the situation. Their explanation for this effect lies in diffusion of responsibility, or the transition of responsibility from the individual to others who also observe.
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one of the most robust and reproduced in the discipline’’, citing reviews such as Latane and Nida (1981). Diffusion of responsibility suggests that whistleblowing is more likely as the number of individuals aware of the situation decreases. However, there are important considerations that suggest whistleblowing behavior will manifest in a manner opposite to what one would expect based solely on diffusion of responsibility literature, and its more-specific corollary, the bystander effect. First, studies involving diffusion of responsibility examined the willingness to help distressed individuals in emergency settings that involve physical harm to a specific victim, such as a seizure (Darley and Latane 1968) or a smoke-filled room (Latane and Darley 1968). When evaluating whether to report fraud, a potential whistleblower does not encounter an emergency that threatens the immediate physical well-being of a distressed victim, but rather ongoing harm to a nonhuman or remote entity. Second, Miceli et al. (2008) argued that diffusion of responsibility might not occur in a whistleblowing context because whistleblowers often have more time to consider the situation than witnesses of a crime. This allows for the consideration of costs and benefits, which may not have occurred to those who rush to action. Third, unlike in a random encounter with a distressed victim, the potential whistleblower typically knows the wrongdoer in fraud settings. Fourth, a distressed victim is less likely to retaliate against a helpful stranger than a wrongdoer is against a whistleblower. Fifth, if a potential whistleblower is the only person other than the wrongdoer who is aware of fraud, they can avoid possible consequences of whistleblowing by merely not reporting, with minimal risk of punishment for staying silent. On the other hand, if others are aware, and management discovers that a potential whistleblower chose not to report, that observer could face punishment for their silence. While evidence regarding this position is sparse, we did find one study that supports our expectation that whistleblowing is less likely as the number of potential observes decreases. Miceli and Near (1988) hypothesized an inverse relationship between the number of potential observers and the likelihood that any individual would whistleblow, consistent with the diffusion of responsibility theory. The authors found that contrary to their hypothesis, whistleblowing was actually less likely as the work group size decreased. While Miceli and Near (1988) tested their hypotheses using archival data, our study allows for experimental investigation of the relationship between number of observers and whistleblowing intentions; thus we provide confirmatory support for prior findings with a more developed theoretical perspective as the foundation for our prediction. This theoretical basis, described above, suggests key differences between diffusion of responsibility in more general settings relative to whistleblowing settings. Accordingly, we propose the following hypothesis:
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H4 Employees are less likely to report fraud when they are the only person in addition to the wrongdoer who is aware of the fraud than if others also are aware.
Methodology Participants We invited members of a local Institute of Internal Auditors (IIA) chapter in a large metropolitan area in the southwestern U.S. to participate. To obtain as large a sample as possible, we provided these IIA members with multiple copies of the instrument and self-addressed return envelopes, and encouraged them to request their fellow employees who, in the internal auditors’ opinions might find themselves in the position of potential whistleblower, to participate as well. We intentionally encouraged the IIA members to distribute the cases to employees outside of their internal audit departments to broaden our sample because any organizational member might face a whistleblowing decision in actual settings. To further encourage participation, we made the instrument available online as well in paper form; prior research suggests that paperbased and online research yield results that are not statistically different (Alexander et al. 2006). This process yielded 138 completed instruments. Of the participants who identified their current position, the most frequent response was that of 24 internal auditors (17%).11 The most frequent industries were 20 in financial services (14%), 18 in wholesale/retail (13%), and 11 in manufacturing (8%). The majority of the 138 participants were male (59%). The majority of participants had an educational background in a business field (78%), and 54 participants (39%) had a background in accounting or finance. Participants’ average work experience was 4.2 years with their current company and 10.0 years in their respective professions. Thus, our sample features participants’ of diverse backgrounds and experience, similar to that of the general population of potential whistleblowers in organizations.12 Experimental Design and Independent Variables Our experiment involved a nested design consisting of four independent variables within six scenarios that described wrongdoing at a hypothetical company. Each of the scenarios involved either financial statement fraud or theft of 11
Research supports the idea that internal auditors may also be classified as whistleblowers (Miceli et al. 1991; Near et al. 1993; Xu and Ziegenfuss 2008), though not all share this view (Jubb 2000). 12 The use of human participants was approved by the appropriate university’s institutional review board, and all participants voluntarily consented to participate.
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company assets, and we controlled for power distance in each scenario by making the wrongdoer the participant’s immediate supervisor. Following each scenario, participants assessed the likelihood they would whistleblow through a confidential hotline and the likelihood others would whistleblow through a confidential hotline; in this fashion, we collect data using both first- and third-person measures. The use of the hotline also allows us to control for power distance by removing the participant’s direct chain of command from the whistleblowing process. After answering all questions related to the experimental scenarios, participants responded to questions regarding the use of confidential hotlines at their actual places of employment. Exhibit 1 summarizes the experimental scenarios and our Appendix presents the text of each scenario.
Exhibit 1 Experimental scenarios and dependent measures scenarios
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We employed a within-subjects design for one theoretical reason and two practical reasons. First, a within-subjects design makes the manipulations of interest visible to the participant. Our goal was to make experimental variations in context salient, so participants could make knowledgeable contrasts of reporting intentions across cases. Therefore, our within-subjects design allows our participants to make conscious decisions regarding the relevance of contextual factors. Second, because the professionals who participated varied greatly in their backgrounds (as is true of potential whistleblowers in actual settings), it is important to control for individual differences. By its nature, a within-subjects design controls for individual differences among participants (Gravetter and Forzano 2009, p. 249; Pany and Reckers 1987). Third, we obtained a valuable sample of ‘‘real-world’’ participants
Scenarios Scenario 1: Misstatement was 0.5 percent of Corporate Expenses (Immaterial) Financial Statement Fraud
Scenario 2: Misstatement was 6 percent of Corporate Expenses (Material)
Scenario 3: Others not aware of incident; wrongdoer not aware participant knows
Scenario 4: Others not aware of incident; wrongdoer aware participant knows Theft of Assets Scenario 5: Others aware of incident; wrongdoer not aware participant knows
Scenario 6: Others aware of incident; wrongdoer aware participant knows
Dependent Measures The following questions represent our dependent measures for each hypothesis. We measured each question on a five-point, Likert-type scale with answers ranging from “not likely” to “extremely likely”. 1. What is the likelihood that you would report this through the confidential hotline if you were in this individual’s position? 2. What is the likelihood that others would report this through the confidential hotline if they were in this individual’s position?
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with significant professional experience. In our study, it would be very difficult to acquire an adequately large sample to facilitate a between-subjects manipulation with sufficient statistical power. Therefore, the use of withinsubjects design is appropriate given this difficulty (Gravetter and Forzano 2009, p. 249).
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difficulty lies in manipulating materiality between theft and financial statement fraud. For instance, does a theft of ten items parallel to material financial statement fraud? Or does the number need to be twenty, or higher? Thus, we felt our design would be stronger if we manipulate materiality based on the financial statement fraud only and held it constant in the theft scenarios.
Fraud Type Wrongdoer’s Awareness Scenarios 1 and 2 involved financial statement fraud committed by the participant’s supervisor to satisfy objectives established by upper management. Specifically, the fraud violated GAAP by misclassifying an operating expense as cost of goods sold. This type of fraud is important because misclassification can be misleading to investors and other financial statement users. Indeed, the U.S. Financial Accounting Standards Board (FASB), working in conjunction with the International Accounting Standards Board (IASB), has recently highlighted concern about the proper classification of financial statement items in a recent Project Update upon which it plans to issue an exposure draft in 2011 (FASB 2011). Thus, this setting for financial statement fraud represents a topical concern of financial accounting regulators. To clarify that fraud had in fact occurred in our scenario, we explicitly stated that the controller intentionally manipulated the financial statements because of pressure from upper management and that this action was inconsistent with Generally Accepted Accounting Principles (GAAP). Scenarios 3–6 involved theft of company assets. In these scenarios, participants read that their supervisor stole company assets by placing inventory items in his car. To clarify that fraud was present, we explicitly use the word ‘‘theft’’ in the scenarios. To test the first hypothesis, regarding differences between types of fraud, we compared the average responses from the financial statement Scenarios (1 & 2) to the average responses from the theft Scenarios (3–6). Materiality of the Financial Statement Fraud We manipulated the materiality of the financial statement fraud by stating that the misstatements represented 0.5% of total corporate expenses in Scenario 1 and 6.0% of total corporate expenses in Scenario 2. To test our second hypothesis, regarding the impact of materiality on reporting, we compared responses from Scenario 1 to those from Scenario 2. We nested our materiality manipulation in the financial statement fraud scenario because it is difficult to compare seriousness across different types of fraud, such as between financial statement fraud and theft. Furthermore, while materiality is relatively salient within financial fraud, the
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The third independent variable is whether the wrongdoer is aware that the potential whistleblower has knowledge of his theft. We include this manipulation, as well as the fourth manipulation concerning others’ awareness, in the theft condition to balance the manipulation of materiality within financial fraud. In Scenarios 3 and 5, the wrongdoer was not aware that the participant had knowledge of the fraud; in Scenarios 4 and 6, the wrongdoer was aware that the participant had knowledge of the fraud. To test the third hypothesis, we average responses from Scenarios 3 and 5 (wrongdoer not aware), and compare those results to the average responses from Scenarios 4 and 6 (wrongdoer aware). Others’ Awareness In Scenarios 3 and 4, the participant was the only person other than the wrongdoer who had knowledge of the fraud. Conversely, in Scenarios 5 and 6, others also had knowledge of the fraud. To test the fourth hypothesis, we average responses from Scenarios 3 and 4 (others not aware), and compare those results to the average responses from Scenarios 5 and 6 (others are aware). Dependent Variable Our primary dependent measure is participants’ intentions to blow the whistle. To compute this variable, we average participants’ assessment of whether: (1) the participant; and (2) others would whistleblow using confidential hotlines in each scenario. We posed questions in both forms because prior ethics research suggests social desirability bias, the possibility that participants attempt to appear in a more positive light than what their actual behavior would suggest, can influence responses to first-person questions (e.g., Cohen et al. 1998, 2001; Chung and Monroe 2003; Pauls and Stemmler 2003; Schultz et al. 1993).We captured these measures using two questions for each scenario: ‘‘what is the likelihood that you [others] would report this through the confidential hotline if you [they] were in this individual’s position’’ on five-point Likert-type scales ranging from ‘‘1 = not likely,’’ ‘‘2 = probably would not report,’’ ‘‘3 = somewhat likely,’’ ‘‘4 = probably would
The Effects of Contextual and Wrongdoing Attributes on Whistleblowing
report,’’ and ‘‘5 = extremely likely.’’ For primary analyses, we combined the first- and third-person measures into an average response. Cronbach’s alphas for all of our averaged dependent variables are greater than 0.70, indicating a high degree of reliability (Nunnally 1978). As part of our hypothesis testing, we also analyze the first and third-person measures individually and conduct sensitivity tests to assess the impact of any social desirability bias to provide a more complete representation of our results. We use reporting through an ethics hotline to measure whistleblowing because it is a common means of reporting fraud with which many employees are familiar. Indeed, the Sarbanes–Oxley Act (SOX, U.S. House of Representatives 2002) requires that U.S. public companies establish and maintain anonymous reporting channels, such as hotlines, and the ACFE reports that the majority of organizations they survey, which includes public companies and other types of organizations, have a hotline in place (ACFE 2010).13
Results Primary Analyses The first hypothesis predicts that employees are less likely to report financial statement fraud than theft. Consistent with H1, a repeated-measures ANOVA model contrasting the average likelihood of reporting in Scenarios 1–2 to that of Scenarios 3–6 indicates that individuals are less likely to report financial statement fraud (mean = 3.33) than theft (mean = 3.85, F = 51.18, P \ 0.001).14 Table 1 presents descriptive statistics and analyses for all hypotheses. The second hypothesis predicts that employees will be less likely to report immaterial financial statement fraud than material financial statement fraud. To test this hypothesis, we used a repeated-measures ANOVA model contrasting the average likelihood of reporting in Scenario 1 to that of Scenario 2. Consistent with H2, results indicate that individuals are less likely to report immaterial financial statement fraud (mean = 3.01) than material financial statement fraud (mean = 3.66, F = 122.67, P \ 0.001). The third hypothesis predicts that employees are less likely to report fraud when the wrongdoer is aware that they have knowledge of the fraud than when the wrongdoer
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is not aware they have knowledge of the fraud. We tested H3 with a repeated-measures ANOVA model contrasting the average likelihood of reporting from Scenarios 3 and 5 to that of Scenarios 4 and 6. Consistent with H3, results indicate that participants are less likely to report when the wrongdoer is aware of their knowledge of the fraud (mean = 3.78) than when the wrongdoer is not aware of their knowledge (mean = 3.92, F = 6.21, P = 0.007). The fourth hypothesis predicts that employees are less likely to report fraud when they are the only person in addition to the wrongdoer who is aware of the fraud (i.e., others are not aware) than if others also are aware. A repeated-measures ANOVA model contrasted the average likelihood of reporting from Scenarios 3 and 4 to that of Scenarios 5 and 6. We find marginal support for H4 such that individuals are less likely to report when others are not aware of the fraud (mean = 3.81) than when others are aware (mean = 3.89, F = 2.70, P = 0.052). We concluded primary analysis by testing each hypothesis for the first- and third-person measures individually (i.e., two tests per hypothesis). Results indicated that H1–H3 remained significant in the predicted directions for both first- and third-person measures, with all P values \0.050. For H4, the third-person measure was consistent with the prediction at P \ 0.050, but the first-person measure was not significant (P [ 0.100). Thus, participants felt that others’ reporting intentions would be affected by whether additional employees knew of the theft, but that their own reporting intentions would not be affected by other employees’ knowledge. Sensitivity Analyses Person-by-Situation Interactions We re-analyzed our hypotheses tests, considering whether years of professional experience, gender, and job responsibilities to investigate reports made through company whistleblower hotlines, and knowledge of a company hotline at participants’ own companies influenced hypotheses. After controlling for each of these variables, the results of our hypothesis tests were unchanged. These analyses also revealed that professional experience was positively correlated with whistleblowing intentions for theft (r = 0.21, P = 0.016, two-tailed), but not for financial fraud (r = 0.08, P = 0.355, two-tailed).15
13
The Sarbanes–Oxley Act (SOX) is a landmark law with significant impact on financial reporting and internal controls for U.S. public companies. With respect to reporting potentially unethical acts, SOX Section 301 requires the establishment of anonymous whistleblowing methods, as through a hotline (U.S. House of Representatives 2002). The U.S. House of Representatives is one of two branches of the national legislative assembly. 14 We report one-tailed P values for hypothesized relationships only.
15
Experience appears to have minimal impact on our results. In addition to our hypotheses being robust to controlling for experience, we examined the relationship between experience and participants’ assessment of the personal costs of whistleblowing in each of the six scenarios; the personal cost question had end points of 1 = ‘‘no personal cost’’ and 5 = ‘‘high personal cost’’. The only significant correlation was a positive relationship between experience and
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Table 1 Hypothesis tests (n = 138) Mean
SD
N
F
P
51.18
\0.001
122.67
\0.001
6.21
0.007
2.70
0.052
A: H1 (Fraud type) compares scenarios 1 and 2 to scenarios 3 though 6 Theft
3.85
0.82
138
Financial statement
3.33
0.90
138
B: H2 (Materiality of financial statement misstatement): scenarios 1 and 2 Material
3.66
0.94
138
Immaterial
3.01
0.98
138
C: H3 (Wrongdoer’s awareness)—scenarios 3 through 6 Wrongdoer is aware
3.78
0.95
138
Wrongdoer is not aware
3.92
0.81
138
0.86 0.89
138 138
D: H4 (Others’ awareness)—scenarios 3 through 6 Others are aware Others are not aware
3.89 3.81
All P values are one-tailed Dependent variables are the average of participants’ indication of: (1) the likelihood they would whistleblow; and (2) the likelihood they think others would whistleblow in the situation We captured these measures in response to the following question: ‘‘what is the likelihood that you/others would report this through the confidential hotline if you/they were in this individual’s position’’ on five-point Likert-type scales. Scale values were ‘‘1 = not likely,’’ ‘‘2 = probably would not report,’’ ‘‘3 = somewhat likely,’’ ‘‘4 = probably would report,’’ and ‘‘5 = extremely likely.’’ Theft is the average of scenarios 3 through 6 Financial Statement Fraud is the average of scenarios 1 through 2
To ascertain whether all participants understood the financial statement fraud, we re-tested H1 (theft vs. financial statement fraud) and H2 (material vs. immaterial financial statement fraud) using ANCOVA models to control for participants’ educational background (in accounting/finance or in other fields). Both H1 and H2 are robust to the use of these ANCOVA models (both P values remain \0.001). Accordingly, we conclude that participants whose backgrounds are outside of accounting and finance possessed sufficient understanding of the financial statement fraud. Social Desirability Bias As we noted in our discussion of our dependent variables, it is possible that social desirability bias can influence participants’ responses in ethics-related research. Accordingly, we performed a two-stage analysis to determine whether our hypothesis tests are robust to social desirability bias, following the method used by Cohen et al. (1998, 2001). First, we computed social desirability bias by subtracting the third-person measure (likelihood others would whistleblow) from the first-person (likelihood you the participant would whistleblow). This step yielded eight measures of social desirability bias—one corresponding to each of Footnote 15 continued personal cost in the immaterial financial fraud scenario (r = 0.217, P = 0.011, two-tailed).
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the eight means in Table 1. The results of one-sample t-tests comparing these differences to zero indicate all eight are significantly positive (all P values \0.001, two-tailed). Accordingly, our participants do display social desirability bias to appear more likely to whistleblow than their peers. The second stage involves re-running the tests of H1–H4 in ANCOVA models with the appropriate measures of social desirability bias as covariates, and requires eight separate ANCOVAs. For example, to test whether H1 is sensitive to social desirability bias, we ran two ANCOVAs. Both models featured two social desirability bias covariates (one for financial fraud, one for theft). In the first (second) model, the dependent measure is the third-person (firstperson) reporting assessment. The ANCOVA results indicate that our hypotheses are robust to the social desirability bias covariate. Specifically, H1–H3 remain significant (all P values \0.041, one-tailed), while H4 remains marginally significant (both P values \0.067). Removal of Internal Audit Participants As we noted in the discussion of our sample, a debate exists concerning whether internal auditors, who typically have a role prescription to report unethical acts, can in fact be whistleblowers. While several researchers agree that internal auditors may be classified as whistleblowers (Miceli et al. 1991; Near et al. 1993; Xu and Ziegenfuss 2008), some opposition exists (Jubb 2000). Accordingly, we
The Effects of Contextual and Wrongdoing Attributes on Whistleblowing
conducted sensitivity analyses to determine whether our hypotheses tests are sensitive to the removal of the 24 internal audit participants. The results for H1–H3 were robust to the removal of internal auditors, with all P values \0.010. H4, however, was no longer significant (P = 0.203). Interestingly, this suggests that internal auditors were sensitive to whether additional employees knew of the theft, despite their role prescription to report fraud, and that this group’s sensitivity may have been driving our significant findings. In conjunction with our sensitivity analyses regarding participants’ experience and educational backgrounds, these results provide two important implications. First, accounting/financial experience and educational background have minimal impact on our results. Second, participants from nonaccounting/financial backgrounds appear to have had sufficient understand of the financial statement fraud scenarios. Supplemental Analyses Fraud Type For this supplemental analysis, we further explore the relationship between fraud type and differences in the likelihood of whistleblowing by comparing the material financial statement to each of the four theft conditions. Given that the whistleblowing likelihood in the material financial statement condition (mean = 3.66) was lower than each of the four theft conditions, we used paired-samples t-tests to determine whether these differences are significant. Table 2 presents descriptive statistics and the t-tests for this supplemental. The results indicate that participants are significantly less likely to whistleblow in the material financial statement
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condition (mean = 3.66) than in both the wrongdoer is not aware (mean = 3.92, t = -3.41, P = 0.001) and the others are aware theft scenarios (mean = 3.89, t = -3.14, P = 0.002). Furthermore, participants are marginally less likely to whistleblow in the material financial statement condition (mean = 3.66) than in the others are not aware theft scenario (mean = 3.81, t = -1.88, P = 0.062). We find no significant difference between reporting likelihood in the material financial statement condition (mean = 3.66) and the wrongdoer is aware theft scenario (mean = 3.78, t = -1.54, P = 0.126). Accordingly, we conclude that participants generally view even material financial statement fraud as less deserving of whistleblowing than theft. Tests of Seriousness and Responsibility Prior research (e.g., Graham 1986; Kaplan and Whitecotton 2001) suggests that context impacts whistleblowing behavior through its influence on the perceived seriousness of the unethical act and perceived responsibility for reporting. Seriousness may impact reporting because of its relationship with creating change (Perry 1993). Responsibility plays a role in the ethical decision-making process as a gatekeeper, in essence determining whether the potential whistleblower should take action. Accordingly, we performed supplemental analyses to investigate perceptual differences in seriousness and responsibility. The seriousness measure was based on participant responses to the question, ‘‘how important is this issue,’’ which was measured using a 5-point Likert-type scale ranging from ‘‘1 = not important’’ to ‘‘5 = extremely important’’ for each scenario. A repeated-measures ANOVA indicated
Table 2 Supplemental analysis: fraud type (n = 138)
Comparison of: Material financial
Mean
SD
N
3.66
0.94
138
Mean difference
t
P
To: Theft: wrongdoer aware
3.78
0.95
138
-0.12
-1.54
0.126
Theft: wrongdoer not aware
3.92
0.81
138
-0.26
-3.41
0.001
Theft: others aware
3.89
0.86
138
-0.23
-3.14
0.002
Theft: others not aware
3.81
0.89
138
-0.15
-1.88
0.062
All P values are two-tailed and are the result of paired-samples t-tests Dependent variables are the average of participants’ indication of: (1) the likelihood they would whistleblow; and (2) the likelihood they think others would whistleblow in the situation We captured these measures in response to the following question: ‘‘what is the likelihood that you/others would report this through the confidential hotline if you/they were in this individual’s position’’ on five-point Likert-type scales. Scale values were ‘‘1 = not likely,’’ ‘‘2 = probably would not report,’’ ‘‘3 = somewhat’’ The Material Financial scenario involves 6% of total expenses In the Wrongdoer Awareness Theft scenarios, the wrongdoer either is or is not aware of the potential whistleblower’s knowledge of the theft In the Others Awareness Theft scenarios, other employees in addition to the wrongdoer and potential whistleblower either are or are not aware of the theft
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that material fraud was considered more serious than immaterial fraud (F = 61.24, P \ 0.001) and that theft (mean = 4.50) was perceived as more serious than financial statement fraud (mean = 4.03, F = 45.83, P \ 0.001). As seems reasonable, there were no significant differences in seriousness for the Wrongdoer Awareness and Diffusion of Responsibility manipulations. When asked to assess the responsibility to report fraud among the six individual scenarios on 5-point Likerttype scales ranging from ‘‘1 = not responsible’’ to ‘‘5 = extremely responsible’’, participants indicated a higher responsibility to report theft (mean = 4.31) than financial statement fraud (4.06, F = 11.87, P \ 0.001). Participants perceived higher responsibility to report the material fraud (mean = 4.22) than the immaterial fraud (mean = 3.91, F = 34.06, P \ 0.001). The greatest responsibility for reporting (mean = 4.37) occurred in the theft scenario where the participant was the only person who knew about the fraud and the wrongdoer was not aware of the participant’s knowledge.
Discussion and Conclusions The objective of this study is to investigate characteristics of both the fraud itself and the context in which it occurs on the likelihood that organizational employees will report fraud (i.e., whistleblow). Examining such whistleblowing intentions is important because of the frequency at which fraud occurs, and the extensive costs to organizations associated with fraud (e.g., ACFE 2010). Furthermore, prior literature provides limited evidence on the effects of fraud type, wrongdoer awareness of the potential whistleblower’s knowledge of the fraud, and the awareness of others in addition to the wrongdoer and the whistleblower on whistleblowing intentions. We compare the two types of fraud identified in accounting standards and contrasted by the most recent ACFE report on occupational fraud (ACFE 2010): financial statement fraud and asset misappropriation. Results concerning our first hypothesis suggest that organizational employees are more likely to report theft than financial statement fraud. A supplemental analysis provides an explanation for our finding concerning fraud type. We find that employees consider theft more serious and perceive a greater responsibility for reporting theft (i.e., perceptions of moral intensity were greater for theft than financial fraud). This greater moral intensity led to an increased likelihood of reporting theft than financial statement fraud. An important question is why participants perceived greater moral intensity for theft than fraud. One explanation is that financial statement fraud might be myopically viewed as a victimless crime since the full
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effects might not be felt for some time, although the losses suffered by employees, investors, and creditors of Enron and other companies that commit fraud would seem to dispel that explanation. It is also possible that financial statement fraud was less likely to be reported than theft because of a general tendency to distrust accounting information, including financial statement numbers resulting from opaque accounting methods. A lack of trust in such information decreases the moral intensity of its misstatement. Additional insight regarding this particular issue may be found in the legal literature (Ribstein 2002). Our results concerning fraud type are especially troubling because financial statement fraud typically is more damaging to the organization and others who rely on the financial statements in terms of monetary cost (ACFE 2010). We conclude that while the reporting of theft is important for safe-guarding corporate assets, the potential impact to the organization from financial statement fraud is much greater, and the relative unwillingness to report financial fraud presents a serious problem to the financial community, as well as to regulators. However, although employee willingness to report financial statement fraud did increase with the manipulated materiality of the fraud, our supplemental analysis on fraud type indicated that participants were generally less willing to whistleblow on even the material financial statement fraud than the theft conditions. Given our results, we believe organizations should consider ethics training that focuses on the pervasive societal and economic consequences of financial statement fraud. Such training could increase employees’ perceptions of the seriousness of, and personal responsibility to report, financial statement fraud. Indeed, our participants were sensitive to differences in seriousness/materiality relating to financial fraud, as we find support for our second hypothesis such that participants were more likely to whistleblow as the materiality of the financial statement fraud increased. Therefore, it appears that a better understanding of the general seriousness of financial statement fraud and an employee’s reporting responsibility can increase whistleblowing intentions following financial statement fraud because participants were sensitive to variations in the seriousness of financial statement fraud. Our third hypothesis predicts that employees are less likely to whistleblow when the wrongdoer is aware of their knowledge of the fraud than when the wrongdoer does not possess such knowledge. We did not identify prior research that specifically manipulates wrongdoer awareness; accordingly, we base this prediction on a greater risk of retaliation when the wrongdoer is aware of the potential whistleblower’s knowledge. Our results support this prediction. This finding suggests that participants reacted to the potential for retaliation, since willingness to report was
The Effects of Contextual and Wrongdoing Attributes on Whistleblowing
lower when the wrongdoer knew their identity. To reduce the influence of this factor, organizations should consider and evaluate policies and practices to guard against retaliation toward whistleblowers. Concerning our fourth hypothesis, consistent with our prediction, we find that employees are less likely to report fraud when they are the only person in addition to the wrongdoer who is aware of the fraud than when others also know. While psychology research on the theory of diffusion of responsibility, and its corollary bystander effect, might lead to the opposite prediction, we believe whistleblowing will manifest in a manner opposite to what would one expect based solely on the existing literature regarding diffusion of responsibility. For instance, the studies that develop that theory and the related effect examine settings in which participants must decide whether to come to the rescue of a person in danger of physical harm (e.g., Darley and Latane 1968). In contrast, a whistleblower does not encounter such an emergency, and must choose whether to initiate a process that may lead to personal harm. In addition, Miceli et al. (2008) noted that diffusion of responsibility might not occur in a whistleblowing context because whistleblowers often have more time to consider the situation and the wrongdoer often is not a stranger; we provide empirical evidence supporting their assertion. Our finding also is important because we identify a setting in which the generally robust bystander effect (Manning et al. 2007) does not apply. More research is needed to further our understanding of this issue. Our study also makes contributions beyond those arising from our manipulations. For example, this study contributes to the ongoing debate in ethics research concerning whether the optimal measure of ‘‘true’’ reporting intentions is to ask whistleblowing intentions in first or third person. We generally found no differences between responses to these alternative measures across our manipulations, though we did observe social desirability bias. Thus, we conclude that in some cases, first- and third-person measures might not yield different results regarding whistleblowing intentions. Future research should continue to investigate this issue in various settings. Also, we test our predictions with individuals who are most likely to face whistleblowing decisions in practice given the frequency at which fraud occurs (e.g., ACFE 2010), as our participants are actual professionals with extensive experience in various fields. Accordingly, our sample is representative of the population of organizational workers who might observe fraud in the workplace. The use of such a sample is critical to whistleblowing research because organizations (Kaplan et al. 2010; Trevino and Victor 1992) and regulators (U.S. House of Representatives 2002, 2010) rely on employees to detect fraud.
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In addition, Miceli et al. (2008) identified a dearth of research on person-by-situation interactions in whistleblowing. We found that personal demographic variables did not moderate the effects of our contextual manipulations on whistleblowing intentions. Therefore, our findings could contribute to future whistleblowing studies investigating the interaction between personal and contextual attributes. Furthermore, we operationalized whistleblowing as calling a confidential reporting hotline to report the fraud. The relative unwillingness of employees to report financial fraud raises questions regarding the effectiveness of the SOX-mandated confidential hotlines (U.S. House of Representatives 2002). We believe further research is necessary to address both the effectiveness of hotlines for the detection and prevention of financial statement fraud, as well as possible alternative control mechanisms for this purpose. One possibility is that organizations could have different types of hotlines or alternative reporting mechanisms for different types of fraud. The financial incentives for reporting contained in the Dodd–Frank Act (U.S. House of Representatives 2010) may also promote the reporting of financial statement fraud.16 Another possibility for future research lies in the societal impact of wrongdoing. Although financial statement fraud generally has a greater impact on society and capital markets than theft, we find that employees are more likely to report theft. Future research should consider the role of perceived societal impact of wrongdoing on whistleblowing intentions. Our study is subject to certain unique limitations. First, we capture participants’ intention to whistleblow rather than actual whistleblowing reports. Prior ethics research indicates that intentions do not always result in the specific action (see Trevino et al. 2006, for a review and MesmerMagnus and Viswesvaran 2005, for a meta-analysis). Second, as with many ethics studies, it is possible that social desirability bias to ‘‘do the right thing’’ influenced our results. Our sensitivity tests indicate the presence of such a social desirability bias in this study, but the results of our hypotheses are robust to controlling for this bias. Third, our experimental design using within-subjects may create demand effects. We made our manipulations explicit so that participants could make conscious decisions regarding the relevance of contextual factors; thus this very demand characteristic was our goal (Pany and Reckers 1987). Therefore, we recognize that our data indicate how participants believe they would behave in the various contrasting scenarios, though this is a limitation of scenario 16
The Dodd–Frank Act offers potential monetary incentives in fraud cases that produce more than $1,000,000 in fines if the whistleblower provides original information that leads to the settlement of the case (U.S. House of Representatives 2010).
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research in general (Curtis and Taylor 2009).17 Furthermore, given our valuable participant group of professionals from diverse backgrounds (consistent with the group of ‘‘real-world’’ potential whistleblowers), our within-subjects design allowed us to both control for individual differences through our design and obtain an adequate amount of data without sacrificing statistical power. Future research using an alternative, between-subjects experimental design, may provide further evidence regarding the impact of these contextual differences on reporting decisions. Acknowledgments We are grateful to Renee Olvera, the workshop participants at the University of North Texas, and the reviewers and participants of the 1st annual AAA Forensic and Investigative Section’s midyear meeting for their insightful comments on prior versions of this paper. We thank Sally Gunz and the two anonymous reviewers whose comments have improved this paper. We also thank the professionals who participated in this study.
Appendix Experimental Scenarios Financial Statement Fraud Assume you are the assistant to a divisional controller of your company. You have recently learned that your boss, the divisional controller, has established the policy that all supplies used by the entire division (office supplies, bathroom paper, and employee drinks, etc.) are to be charged to Cost of Goods Sold, rather than Supplies Expenses as required by Generally Accepted Accounting Principles, in order to meet upper management’s cost containment objectives. Scenario 1(2) Assuming this represents 1/2 of 1% (6%) of total expenses for the company, what is the likelihood that you would report through the confidential hotline if you were in the individual’s position? Theft Assume you are an employee in the warehouse and have observed the warehouse supervisor placing company inventory into his car. Scenario 3(4) Assuming you are the only other person who knows of the theft and the supervisor is not (is) aware of your knowledge, what is the likelihood that you would report through the confidential hotline if you were in the individual’s position? Scenario 5(6) Assuming you are not the only other person who knows of the theft and the supervisor is not (is) aware of your knowledge, what is the likelihood that you 17 Kruglanski (1975, p. 103) defined demand bias as ‘‘error in inference regarding the cause of an observed effect.’’ Such bias may arise when subjects can discern the experimental hypothesis and are motivated to respond in a ‘‘good subject’’ role. Anonymous surveys of professionals, such as that used in our study, should greatly reduce that motivation (Schepanski et al. 1992).
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would report through the confidential hotline if you were in the individual’s position?
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