US companies ignoring whistle-blowers

Jul 14 2010 by Brian Amble Print This Article

Among the hundreds of requirements contained in the Sarbanes-Oxley Act, Section 301 mandated a company's audit committee to establish procedures for "the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters."

Yet as a 2007 study found (Who Blows the Whistle on Corporate Fraud), the number of instances of employee whistleblowing in large US companies actually fell after Sarbanes-Oxley came into effect - powerful evidence that as far as potential whistle-blowers are concerned, the Act's attempts to provide effective confidential channels for disclosure - not to mention protection from retaliation - are inadequate.

But as a new study published in the Journal of Management Studies suggests, it isn't just that the provisions of Section 301 are inadequate. As far as most US public companies are concerned, their response to anonymous allegations is simply to ignore them - even when these allegations involve very serious accounting breaches.

The study, which involved more than 80 eighty audit committee members from US public companies, set out to explore the effectiveness of whistle-blowing channels, how evidence of fraudulent activity is viewed by the board of directors, and how these situations are handled by the board of directors when they occur.

What it found is that anonymous allegations are treated very differently from non-anonymous allegations, and anonymous allegations are largely ignored, particularly when the allegation involves a member of the senior management team.

However, if an identical non-anonymous allegation surfaces, audit committees often launch into action and significant resources are allocated to investigating it.

According to Jake Rose, co-author of the study and Associate Professor at the University of New Hampshire Whittemore School of Business and Economics, when an anonymous allegation poses a threat to a director's professional reputation, a sort of 'distortion of information' takes place.

"An audit committee has an incentive to not investigate the allegation when it creates a reputation threat, and this causes the committee member to believe the allegation is less credible," he said.

"Our presumption is that most corporate managers, auditors, and corporate directors are honest and ethical people. However, under certain circumstances, 'good' people can engage in 'bad' behavior."

Dr Rose added that the study highlights the fundamental weakness at the heart of the US approach to financial fraud, namely that such allegations are investigated internally rather than being referred to an independent body that has no connection to the organisation.