Increased Motivation for Whistleblowing

Article excerpt

New statutory and regulatory changes provide greater rewards to individuals who blow the whistle on fraudulent activities and to organizations that actively encourage an effective ethical culture-important steps at a time when the rate of fraudulent financial activity is likely to increase.

The current economic climate has greatly helped to create and sustain an environment conducive to fraudulent financial reporting. As part of its emphasis on enforcement and investor protection, the Securities & Exchange Commission (SEC) has reported a significant increase in 2010 in both the number and the size of fraud cases. The agency even formed an Investor Advisory Committee in 2009.


Now, provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), e.g., Title IX--Investor Protection and Securities Reform Act of 2010, and new incentives contained in amendments to the U.S. Federal Sentencing Guidelines are likely to increase the motivation for whistleblowing activities and subsequent assertions of fraud.

The probability of wrongdoing is likely to increase. According to the 2010 Ethics & Workplace Survey published by Deloitte, one reason is that the economic downturn has diminished two important elements of conducting business: trust and ethics. Nearly a third of employees surveyed said their fellow workers are more likely to behave in an unethical manner in today's environment. The report noted that almost half of employees who planned to search for new employment when the job market recovers stated that one of their reasons for leaving was a loss of trust in their employer because of how decisions were made.

These factors will likely contribute to more instances of fraudulent financial reporting. More than half the respondents to a web cast poll conducted by Deloitte think more financial statement fraud will be uncovered in 2010 and 2011 compared to the past, and 45% believe fraud is getting harder to detect because of changes in the risk environment. Manipulation of revenue recognition was cited as the greatest concern, followed by "big-bath" write offs while earnings expectations are low and manipulation for debt covenant compliance purposes.

As reported regularly in the biannual Report to the Nations on Occupational Fraud and Abuse from the Association of Certified Fraud Examiners (ACFE), the most fruitful source of information leading to discovery of fraudulent activity is whistleblowing tips from employees or outsiders. Having an anonymous method to report wrongdoing has significant benefits, according to the ACFE, including quicker discovery, shorter duration, and smaller losses.

While the term "whistleblowing" can mean different things to different people and in differing environments, Brian Martin, a professor at the University of Wollongong in Australia and author of The Whistleblower's Handbook: How to Be an Effective Resister, has widely publicized a definition of whistleblowing:

"Whistleblowing is an open disclosure about significant wrongdoing made by a concerned citizen totally or predominantly motivated by notions of public interest, who has perceived the wrongdoing in a particular role and initiates the disclosure of her or his own free will, to a person or agency capable of investigating the complaint and facilitating the correction of wrongdoing."

It should be noted that only disclosures of "significant" wrongdoing should be considered whistle-blowing, not legitimate differences of opinion or minor concerns. Also important is that the motivation for disclosure shouldn't be personal but should reflect the interests of a larger public. The language describing the whistleblower as a concerned citizen reflects the fact that issues of whistleblowing in the past were largely limited to the government sector, including lawsuits under the False Claims, or qui tam, statutes.

A more legalistic definition of whistleblowers is contained in Whistleblowing: The Law of Retaliatory Discharge by Daniel Westman and Nancy Modesitt: "Employees who oppose, either internally or externally, their employer's conduct. …