Study Shows That Whistleblowing Deters Wrongdoing 15:12, May 5, 2017

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Study Shows That Whistleblowing Deters Wrongdoing

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Research by a University of Iowa accounting professor indicates that companies that are subject to whistleblower investigations experience a “sharp and lasting drop in financial wrongdoing.” The report, by Assistant Professor Jaron H. Wilde, is called “The Deterrent Effect of Employee Whistleblowing on Firms’ Financial Misreporting and Tax Aggressiveness.” It’s scheduled to be published in The Accounting Review in late 2017.

As the New York Times reported, the study “demonstrates for the first time that financial shenanigans at companies decrease markedly in the years after truth tellers come forward with information about wrongdoing inside their operations.”

Wilde’s research found that compared to control firms, whistleblower firms were significantly more likely to experience a decrease in the incidence of accounting irregularities and a decrease in tax aggressiveness, and that the decrease lasted for at least two years.

Measuring the Effectiveness of Whistleblowing Actions

As Frédéric St-Martin discusses on the FCPA Blog, it’s hard to measure the effect that whistleblowing has on an organization. Various researchers have studied indicators such as the extent to which wrongdoing was terminated, whether an organization launched an investigation and made changes, and whether whistleblowers experienced reprisals.

In describing Professor Wilde’s research, the New York Times calls whistleblowers “agents of change” to build a foundation for compliance culture within their organizations. Successful companies create a culture of compliance to protect themselves and their customers.

Internal Whistleblowing Also Benefits Organizations

Studies have also shown that companies benefit from internal whistleblowing, which can result in problems being caught early. As Adam Siegel of international law firm Freshfields Bruckhaus Deringer notes:

Robust whistleblowing policies bolster a company’s argument that it has implemented adequate procedures to guard against bribery. They also make it more likely that concerns will be raised internally rather than falling under the scrutiny of external regulators or damaging a company’s reputation.

SEC Files Charges When Severance Agreements Impede Whistleblowing

The Securities and Exchange Commission (SEC) has turned its attention to companies that use severance/separation agreements to try to prevent departing employees from whistleblowing. On December 20, 2016, SandRidge Energy Inc. agreed to pay $1.4 million for using separation agreements containing restrictive language that prohibited outgoing employees from participating in any government investigation or disclosing information that was potentially harmful or embarrassing to the company. The company was also charged with firing an internal whistleblower.

As Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated:

Whistleblowers who step forward and raise concerns internally to their companies about potential securities law violations should be protected from retaliation regardless of whether they have filed a complaint with the SEC. This is the first time a company is being charged for retaliating against an internal whistleblower, and the second enforcement action this week against a company for impeding employees from communicating with the SEC.

This case shows that the SEC has increased the scope of its protection of whistleblowers and will be aggressive in protecting them. Encouraging whistleblowers reinforces an organization’s compliance culture and helps to prevent the risk of SEC retaliation charges or the loss of a company’s reputation.

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Christine Day
Christine Day is a legal editor at EverFi. She writes about employment law issues and tracks case law and legislative and regulatory updates. Before joining EverFi she worked in legal publishing, researching and writing about tax law, business law, and employment law. She earned her JD from the University of San Diego Law School and her BA from the University of Southern California.

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