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  • Financial Incentives Can Discourage Whistleblowing: Study

    December 6, 2017 by Emily Zulz

    Financial awards can unintentionally discourage a whistleblower from reporting fraud in a timely manner by hijacking their moral motivation to do the right thing, according to a new study.

    The study by researchers at Florida Atlantic University, Wilfrid Laurier University in Ontario and Providence College in Rhode Island — “Hijacking the Moral Imperative: How Financial Incentives Can Discourage Whistleblower Reporting” — was recently published in Auditing: A Journal of Practice & Theory.

    According to the study, recent evidence indicates that the most common means of initial fraud detection is the receipt of a whistleblower tip and that nearly 40% of all discovered frauds are uncovered in this manner.

    A number of companies and regulatory agencies currently offer, or are considering offering, financial incentives to encourage whistleblowers to report unethical behavior. An increasingly common feature of these whistleblower incentive programs is the application of minimum value thresholds for reward eligibility, according to the study.

    For example, the study points to incentive programs administered by the Securities and Exchange Commission and the Internal Revenue Service that only provide financial incentives if the reporting leads to a recovery exceeding a specified minimum threshold of $1 million and $2 million, respectively.

    The study examines whether the inclusion of minimum threshold features can “unwittingly” increase the likelihood that certain identified frauds will go unreported.

    While conventional wisdom suggests that financial incentives will help to motivate whistleblower reporting, the study finds that this may not be the case.

    “When you mention financial incentives to potential whistleblowers, you change the decision frame from ‘doing the right thing’ to that of a cost-benefit analysis,” James Wainberg, assistant professor of accounting at FAU’s College of Business, said in a statement. “As a result, when the perceived risks of reporting are greater than the potential rewards, people will be much less likely to report frauds than had they not been told about the existence of an incentive program to begin with.”

    Wainberg is a co-author of the study, along with Leslie Berger, assistant professor of accounting at Wilfrid Laurier University, and Stephen Perreault, associate professor at Providence College School of Business.

    Wainberg, Berger and Perreault look at this shift from intrinsic to extrinsic motivation, which is often referred to as “motivational crowding.”

    According to the report, “the application of financial rewards (an extrinsic motivator) can unintentionally hijack a person’s moral motivation to ‘do the right thing’ (an intrinsic motivator).”

    Applying this “motivational crowding” theory, the trio conducted an experiment and found that, in certain contexts, incentive programs can inhibit whistleblower reporting to a greater extent than had no incentives been offered at all.

    Participants in the experiment, which included auditors and accountants, were provided with a vignette describing the discovery of fraud committed by a superior and were asked to assess the likelihood that a potential whistleblower would report the fraud through a whistleblower hotline.

    Wainberg, Berger and Perreault manipulated the description of the hotline program so that the size of the fraud was either above or below a prescribed minimum threshold that entitled the whistleblower to receive a financial incentive for reporting. They also included a third condition that presented participants with a whistleblower hotline program description containing no mention of financial incentives at all.

    The responses from the experiment indicated that when incentives were available — but the size of the fraud was less than the prescribed minimum threshold — participants assessed a lower likelihood that the fraud would be reported in a timely manner. The experiment also found a higher likelihood that reporting would be delayed than had the whistleblower program not mentioned financial incentives at all.

    As such, the study demonstrates that including a minimum threshold feature in whistleblower reporting programs can inhibit the timely reporting of smaller frauds.

    “This finding is especially problematic since the early detection of fraud is a critical factor in minimizing potential damages and securing access to evidence,” the report states.

    The study also found that when minimum thresholds for rewards are employed, there was a greater likelihood that the whistleblower would strategically delay reporting the fraud (i.e., wait for the fraud to grow in size before reporting).

    “What our study finds is that people may unlawfully wait for the fraud to increase in size before reporting it,” Wainberg said in a statement. “The question we need to ask is do we really want to incentivize whistleblowers to delay reporting frauds in order to maximize their rewards?”

    Originally Posted at ThinkAdvisor on December 4, 2017 by Emily Zulz.

    Categories: Industry Articles
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