Anonymous whistle-blowers ignored

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If you discover financial fraud at your company, be prepared to state your name if you want to make a report.

A study shows that even when an anonymous allegation involves serious accounting breaches, corporate directors often take no action.

However, when the allegations are not anonymous, audit committees often launch into action and corporate directors allocate significant resources to the investigation.

The first study to investigate this issue with practicing audit committee members has been published in the Journal of Management Studies.

Public corporations are required to provide anonymous whistle-blowing channels to their employees. Such reporting channels are intended to protect shareholders from financial fraud by making it more likely that employees – without fear of retaliation – will report fraud to the board of directors.

But this study has shown that anonymous allegations are largely ignored, especially when a leader’s potential reputation is involved.

“We found that when an allegation poses a threat to a director’s professional reputation, a form of distortion of information occurs. An audit committee has an incentive to not investigate the allegation when it creates a reputation threat, and this causes the committee member to believe the allegation is less credible,” said Jake Rose, an associate professor at the University of New Hampshire Whittemore School of Business and Economics, and co-author of the study.

“Our presumption is that most corporate managers, auditors, and corporate directors are honest and ethical people. However, under certain circumstances, ‘good’ people can engage in ‘bad’ behavior.”

These findings indicate an “essential failure” of corporations’ first line of defense against financial fraud.

The authors say there are potential pitfalls of allowing directors to serve on multiple corporate boards, and an independent body needs to be in charge of investigating whistle-blowing allegations.

More than 80 audit committee members from publicly traded United States companies participated in the study.