A recent study by a University of Iowa business professor claims to offer the nation’s regulatory community something that it hasn’t seen before: evidence that whistleblower programs not only flag current financial hijinks but also deter companies from playing fast and loose with the rules in the future.
“This is a very policy-related topic,” said Jaron Wilde, an assistant professor of accounting at UI. “Congress has mandated that the (Internal Revenue Service) and (Securities Exchange Commission) have whistleblower programs. In this heightened regulatory environment, I hope this at least provides some early preliminary evidence that whistleblowing can have a deterrent effect.”
After analyzing cases involving hundreds of public companies in the U.S., Wilde found a significant and long-lasting decrease in a company’s level of misreporting and tax avoidance in the wake of whistleblower investigations.
The findings come at a time when some critics have been questioning the ability of whistleblower programs to bring to light companies’ questionable financial misreporting or unethical — if not outright illegal — strategies to avoid paying taxes.
Wilde’s study is scheduled to be published in a forthcoming issue of The Accounting Review, but it started attracting national attention earlier this week after Wilde was interviewed by Gretchen Morgenson, a Pulitzer Prize-winning columnist for the New York Times.
“For those who doubt that whistle-blowers are a force for good in corporate America — and yes, such skeptics exist — a new study out of the University of Iowa could not be more important,” Morgenson wrote.
Iowa Republican Sen. Chuck Grassley, who is well-known for championing whistleblower protections and incentives, said he hasn’t reviewed Wilde’s work and declined to offer specific comment on the study. But Grassley stressed the value of such programs for ensuring that employees say something when they see something.
“Having whistleblowers on the case helps the SEC do its job,” Grassley said in an emailed statement. “Whistleblowers know where fraud is. In the case of federal agencies, they save taxpayers money. In this case, they help ensure the integrity of the securities markets. These individuals deserve incentives to come forward. They deserve celebration and protection from any retaliation so they can continue to do their good work.”
Since its whistleblower program began in 2011, the SEC reports having awarded more than $136 million to 37 whistleblowers who voluntarily provided the commission “with original and useful information that led to a successful enforcement action.” The resulting enforcement actions, according to the SEC, have resulted in more than $874 million in financial remedies.
Critics also question the practical value of the thousands of tips offered to the SEC through these programs, saying many simply come from disgruntled employees looking for some kind of financial reward.
Wilde’s study, however, focuses on cases in which the whistleblowers later claimed their company engaged in some form of retaliation against them. Those complaints — brought forward under the 2002 federal Sarbanes-Oxley law — are adjudicated by the Occupational Safety and Health Administration in the U.S. Department of Labor.
The OSHA records made available to Wilde and his colleagues through the Freedom of Information Act spanned from 2003 to 2010. For the purposes of his study, 317 whistleblower companies had data for his financial reporting tests, and 237 companies had data for the tax avoidance tests.
The names and titles of the employees were redacted — leaving Wilde with details of the later complaints against the company but unable to speculate on the tipsters’ initial motives for raising alarms.
“These stigmas are pretty severe,” Wilde said. “Some go as far as to say there were blackballed whenever to they tried to change their jobs.”
Using the records, Wilde compared the companies’ financial reporting and tax avoidance practices the two years before the whistle-blowing incident and the two years after the incident. He then compared them to similar practices in a control group of companies that weren’t under whistleblower investigation.
He saw a significant decrease in the amount of financial misreporting and tax avoidance deployed by the company throughout the two years after the whistleblowing incident. His study did not look beyond those two years to see if the trend continued or reverted to the pre-incident levels.
Wilde said the reason there hasn’t been more archival research concerning the long-term impact of whistleblowing programs is that the data remains so difficult to obtain.
The OSHA records he used came from data that some of his colleagues had collected for a different project and were generous enough to share with him. It took them more than a year to get the OSHA filings from the various offices, he said.
Despite the difficulty in obtaining the records, Wilde said he remains focused on exploring the future-focused affect of these and other regulatory efforts.
“As the SEC chair, Mary Jo White, recently said, deterrence is ultimately the most effective enforcement strategy,” he said.