Why come forward with information on a fraud?
Whistleblowers in Australia can be reviled more than rewarded
To whistleblow or not to whistleblow? New research suggests the answer may come down to financial incentives and just how seriously people perceive any wrongdoing to be.
The study, with professional accountants, examines whether a monetary reward would encourage them to report fraud internally and to a relevant authority, and what impact the level of incident seriousness would have on their decision.
Clinton Free, a professor in the school of accounting at UNSW Business School, was one of the researchers and says the headline finding is that perceptions of seriousness of any wrongdoing play an important part in determining the influence of any financial incentives.
“Where there is high seriousness, people seem to whistleblow almost regardless of whether there’s a financial incentive,” Free says. However, when people have a lower perception of the seriousness of the act they respond more to a financial incentive.
Together with UNSW Business School’s Paul Andon, Radzi Jidin and Gary S. Monroe, and UQ Business School’s Michael J. Turner, Free has co-authored the paper, 'The Impact of Financial Bounties and Perceptions of Seriousness on the Decision to Blow the Whistle'.
The authors find “a significant interaction between the provision of a financial incentive and the perceived seriousness of the wrongdoing”.
Heroes or villains
The study provides an interesting insight into the often fraught nature of whistleblowing. Free says whistleblowers are variously regarded as heroes or villains, sometimes receiving limited support and even experiencing acts of retribution for exposing apparent wrongdoing.
As a result, discussions in this area are frequently around the protections or provisions in place for whistleblowers.
In this country we started from a different point where we saw it as dobbing initiallyCYNTHIA KARDELL
In the US, the Securities and Exchange Commission (SEC) has paid millions of dollars to some whistleblowers and there are a number of jurisdictions around the world with regulatory strategies that provide safeguards and financial incentives for corporate whistleblowers, including South Korea, Canada and Mexico.
This type of incentive does not exist in Australia. According to Andon, an associate professor at UNSW Business School, this is significant given prominent Australian cases involving the likes of Jeff Morris, who has publicly admitted that his actions in exposing misconduct in the Commonwealth Bank’s financial planning arm in 2008 have resulted in a huge personal toll. This is despite Morris’s actions being vindicated by a Senate inquiry.
Andon notes that there are clear risks for such people, who can face downsides when going through the whistleblowing process, such as protracted legal disputes, job losses and financial hardship.
“So we wanted to see how these sort of whistleblowing protections were possibly helpful in not just encouraging but supporting people who are looking to whistleblow,” he says.
After the global financial crisis, the Dodd-Frank Act (formally known as the Wall Street Reform and Consumer Protection Act 2010) came into force in the US. It allows, in certain circumstances, the SEC to pay whistleblowers between 10% and 30% of monetary penalties collected if their information results in successful SEC actions.
“This initiative represents a significant escalation not only in the incentives offered to whistleblowers, but also is an acknowledgement of the increased strategic regulatory importance attached by the US Government to whistleblowers,” Free and his colleagues note.
To date, the US case that has garnered most media and public interest is a payout last year to a person living abroad who helped the SEC uncover a particularly hard to detect fraud. The $US30 million reward is the largest made by the SEC’s whistleblower program.
Andrew Ceresney, director of the SEC’s division of enforcement, says that “this record-breaking award sends a strong message about our commitment to whistleblowers and the value they bring to law enforcement”.
Cynthia Kardell, national president of Whistleblowers Australia, says the Dodd-Frank Act highlights a different whistleblowing culture in America, compared with Australia, a difference that has its origins with former president Abraham Lincoln in the 1860s.
“He was very upset at buying gunpowder and being supplied with sawdust instead,” Kardell says. “He was so annoyed about people duping the public in this way that he passed legislation which was the beginning of the first False Claims Act.”
This US system, which has been beefed up during the intervening years, has ensured that when people come forward with information on a fraud they can share in the money that is recouped. US whistleblowers are also protected under the Whistleblower Protection Act, giving them employment security.
Accountants are in a privileged position to uncover or even perpetrate the fraudCLINTON FREE
Kardell says it is a far cry from Australia, where a historical dislike of people “dobbing in a mate” has proven difficult to change.
“In this country we started from a different point where we saw it as dobbing initially,” she says.
Kardell adds that there is a stigma attached to whistleblowers sharing in monetary rewards, with one politician telling her: “If you want money then you aren’t a bona fide whistleblower because you should want to do it for the public good.”
Although there are whistleblower Acts in all Australian jurisdictions now covering government agencies, as well as some private sector schemes, Kardell believes more must be done – including the possibility of introducing a rewards system similar to the US.
“We would like to see a False Claims Act because we see that as complementing all the other pieces of legislation which operate in the public sector,” she says.
According to Free, it is not clear why regulators in Australia have had a limited appetite for rewarding whistleblowers.
“[The Dodd-Frank Act] has resulted in a huge number of allegations to be made at a relatively small amount of payouts,” he says. “So we can see that the program there has been well patronised by potential whistleblowers.”
Andon adds that the US is not alone, with nations with significantly different cultures such as South Korea, also embracing similar approaches.
“So I’m not sure if it’s a specific cultural thing as opposed to a slowly growing awareness of the importance of whistleblowing in the fight against fraud at a policy level,” he says.
‘Just want the job to be done’
The research team solicited accountants for the study because a large percentage of frauds involve some part of the accounting cycle. About 80 respondents were surveyed.
“Accountants are in a privileged position to uncover or even perpetrate the fraud,” Free says.
The results highlight at least two promising avenues for future work:
“First, emerging research in the area of personality provides a basis for further investigation on the impact of personality variables on the propensity of whistleblowing”. And research involving actual whistleblowers could “generate new insights into the practical considerations attached to the fraught decision to whistleblow”.
“Although economically and socially critical, the decision to blow the whistle for financial statement fraud remains in many ways mysterious,” the researchers say.
According to Kardell, “people don’t whistleblow lightly”, so she is surprised the research results show incentives may encourage people to report less serious matters. She believes there is a common thread among the whistleblowing community.
“I think in everything you read about whistleblowers, they don’t want to be heroes. They just want the job to be done,” Kardell says.