A new study found that financial rewards can unintentionally cause whistleblowers to delay reporting fraud or not report it at all.
The study appeared in the August edition of Auditing: A Journal of Practice & Theory.
Financial rewards can “hijack the moral motivation to do the right thing,” according to the study.
The researchers were James Wainberg, Ph.D., assistant professor of accounting at Florida Atlantic University, Leslie Berger, Ph.D., assistant professor of accounting at Wilfrid Laurier University, and Stephen Perreault, Ph.D., associate professor at Providence College School of Business.
“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,” Wainberg said in a post on Florida Atlantic’s site.
“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 said.
Minimum thresholds for whistleblower rewards can also distort the reporting process, the study found.
When there are minimum thresholds for rewards, there’s more chance the whistleblower will wait for the fraud to grow in size before reporting it, the study found.
The SEC only offers rewards if the whistleblower’s reporting leads to a recovery of $1 million or more.
“What our study finds is that people may unlawfully wait for the fraud to increase in size before reporting it,” Wainberg said.
“The question we need to ask is do we really want to incentivize whistleblowers to delay reporting frauds in order to maximize their rewards?”
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“Hijacking the Moral Imperative: How Financial Incentives Can Discourage Whistleblower Reporting” by Leslie Berger, Stephen Perreault, and James Wainberg published in Volume 36, Issue 3 (August 2017) of Auditing: A Journal of Practice & Theory is here.
Richard L. Cassin is the publisher and editor of the FCPA Blog.