Whistleblowing Linked to Decrease in Financial Misconduct

Public companies appear to have a better handle on their books after a whistleblower investigation, according to a new study reported by The New York Times.

Jaron H. Wilde from the University of Iowa attempted to clarify the impact on corporate practices of employees blowing the whistle. He concluded that whistleblowing can lead to lasting changes within a company and a sharp decrease in financial misconduct.

The study used Department of Labor data from 2003 to 2010 to identify 317 public companies where employees filed a complaint with the Occupational Safety and Health Administration (OSHA) for facing whistleblower retaliation. Those companies were tracked against “control firms” for changes in financial reporting. The study left out other types of whistleblowing in which employees did not submit retaliation claims to OSHA or whistleblowing could not be observed.

Wilde’s findings appear to contradict previous studies:

In addition to demonstrating the deterrent value of whistle-blowing, Mr. Wilde’s study, which will be published in a forthcoming issue of The Accounting Review, counters previous research that criticized truth tellers. Some studies have questioned whistleblowers’ motivations in bringing cases, as well as the merits of their complaints, Mr. Wilde noted. For example, some researchers have contended that allegations of wrongdoing may be frivolous or driven by employees’ personal vendettas.

But Mr. Wilde’s research found that many of the tips were valuable. He determined that they typically involved companies with a significantly higher likelihood of financial misreporting in the period before the individuals came forward. While he acknowledged that some of the cases he studied were inconsequential, he added that there were “certainly a number of instances where whistle-blowers are providing critical incremental information that allows the government to have a case against a company or an employee.”

The study also underscores the notion that insiders are best positioned to monitor companies’ financial reporting. This has become especially true as corporations have grown larger and more complex, Mr. Wilde said.

Read the full article at The New York Times.