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Study: Whistleblower reward programs discourage whistleblowers

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?”

*    *     *

“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. 

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  1. Perhaps a better conclusion to be drawn, from the theory of motivational crowding, is that shareholders and boards “may” have been incentivizing white collar criminals for years; thus, hijacking the moral imperative of our corporate leaders, “to do the right thing”?

    Keep in mind that OECD research and recent history demonstrates that the vast majority of bribery and corruption occurs at the highest level of corporations. This makes sense, because executives and senior managers have the most to gain from meeting their targets, as set by the board, and they have the greatest opportunity. They are also, by nature, risk takers.

    So, how does a regulator find out about the complex bribery and corruption schemes that were potentially orchestrated at the highest level of a corporation? Do they rely on self-reporting or the formal internal whistleblower reporting mechanism?

    My experience as a corporate executive says no. Employees, especially in developing markets (where the majority of corruption occurs), don’t trust or use internal reporting mechanisms. Moreover, corporate lawyers (at least historically) have been loath to agree to self-reporting.

    My premise, as a whistleblower to the SEC, is that meaningful financial incentives (or insurance), along with other whistleblower protections, are the most powerful tools a regulator has for ensuring that the most egregious occurrences of corporate corruption are reported.

    As Sean McKessy, former head of the SEC Whistleblower Office, stated in an Op-ed to the Australian Financial Review earlier this year (, “Before Dodd-Frank, a whistleblower program that promised confidentiality and encouraged corporations to create strong internal reporting programs for employees had a negligible effect on stopping significant corporate fraud”.

    My personal experience leads me to believe that whistleblowers don’t wait. And, if financial gain is the true incentive, there are only disincentives for delay. Someone else may report the transgressions first.

    My allegations were reported in under a month, after speaking with a qualified attorney.

    There are numerous other variables that impact the reporting timeline, which have nothing to do with financial incentives and were not considered by the researchers who conducted the study.

    For example, one variable is “knowledge of a potential violation”. Unlike the test group in the research, which consisted of auditors and accountants, the average whistleblower is going to have a hard time understanding what is, or isn’t, a potential violation, especially when dealing with a very nuanced scheme (it’s very seldom cash in a brown paper bag). This “lack of knowledge” will most certainly determine when, and how much, information is reported to a regulatory authority.

    The very constrained nature of the research conducted in this case leads me to believe that the findings are inconclusive and should have no impact on decisions made to incentivize whistleblowing. Moreover, as someone who went through hell in order to do the right thing, I believe that poorly informed and planned research like this has the potential of turning the heroes into villains.

  2. Simply put, the study is flawed. The SEC whistleblower rules, as originally proposed, did indeed encourage whistleblowers to delay reporting fraud in anticipation of greater damages and thus be eligible for a potential greater reward. However, at my urging (and presumably other whistleblowers and attorneys) the final rules include incentives to report a suspected fraud early and, in fact, allows for payment of a whistleblower reward for reporting a planned fraud before there are any victims, and thus no losses upon which to base a reward. In the later case, any reward would be based on financial losses (and associated penalties) had the fraud been carried out to the point there were victims. Suggest the researchers undertake a more careful reading of those final rules.

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