Research on Professional Responsibility and Ethics in Accounting

C. Richard Baker, Charles Richard Baker

• Publisher: Emerald Publishing Limited
• Year: 2019
• ISBN:
  9781789733716
• Topic: Business
• Subtopic: Accounting
• Index: Business

Research on Professional Responsibility and Ethics in Accounting is devoted to publishing high-quality research and cases that focus on the professional responsibilities of accountants and how they deal with the ethical issues they face. The series features articles on a broad range of important and timely topics, including professionalism, social responsibility, corporate responsibility, ethical judgments, and accountability. The professional responsibilities of accountants are broad-based; they must serve clients and user groups whose needs, incentives, and goals may be in conflict. Further, accountants must interpret and apply codes of conduct, accounting and auditing principles, and securities regulations. Compliance with professional guidelines is judgment-based, and characteristics of the individual, the culture, and situation affect how these guidelines are interpreted and applied, as well as when they might be violated. Interactions between accountants, regulators, standard setters, and industries also have ethical components. Research into the nature of these interactions, resulting dilemmas, and how and why accountants resolve them is the focus of this journal.

CHAPTER 1

MAKING CRIME PAY: TIMING OF EXTERNAL WHISTLEBLOWING

Andrea M. Scheetz and Joseph Wall

ABSTRACT

With the increasing prevalence of awards for reporting fraudulent activity, it is important to learn if there are unintended consequences associated with the language offering such awards. Aside from issues regarding submitting unsubstantiated claims of fraud to the Securities and Exchange Commission (SEC), Section 922 of the Dodd–Frank Act may inadvertently encourage would-be whistleblowers to delay reporting fraud. Potential whistleblowers may choose to delay reporting due to the consideration of alternatives to external reporting, in a misguided attempt to increase the size of an award, or due to their ethical stance on the issues. Using a three-stage mixed methods (experiment, open-ended interviews, and experiment) approach, this study provides evidence that increased knowledge of statutes involving external whistleblowing may result in reporting delays. The data suggest that despite statements from the SEC forbidding this, managers may choose to delay reporting when under the threshold necessary to receive an award. In such a manner, managers may be allowing the fraud to grow to a necessary perceived level over time. As might be expected, the accountants in this study were more cautious, checking to see if internal reporting worked first. Of particular note, 16 individuals indicated that they would never report, with the motivation apparently driven by fear of job loss and/or retaliation. Lastly, the intention to delay or speed up reporting may be very different based on the perception of ethics involved in the decision.

Keywords: The Dodd–Frank Act; whistleblowing; fraud; reporting; wrongdoing; fraud materiality

INTRODUCTION

This study examines the impact of knowledge and understanding of statutes involving external whistleblowing on the timing of when, following the discovery of fraud, employees choose to report fraud externally. The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank) provides an ideal conduit for this study due to the whistleblowing provisions of the Act allowing for rewards, under certain circumstances, when fraud is reported to the Securities and Exchange Commission (SEC). The Association of Certified Fraud Examiners (ACFE, 2018) has reported an increase in fraud cases. Likewise, the report commissioned by Kroll (2017) has also reported an increase in fraud incidents. The ACFE’s 2018 Report to the Nations is based on the 2017 Global Fraud Survey of Certified Fraud Examiners. The ACFE (2018) reports 2,690 incidents of fraud occurring between January 2016 and late 2017. This represents an increase from the 2016 and 2014 Global Fraud Surveys which reported 2,410 and 1,483 incidents of fraud, respectively (ACFE, 2014, 2016). Kroll’s Global Fraud & Risk Report¹ found that companies reporting at least one incidence of fraud rose to 82%, up from 75% in 2015 (70% in 2013 and 61% in 2012).

The aforementioned fraud statistics are somewhat counterintuitive following the enactment of legislation designed to put the public’s mind at ease when it comes to large-scale fraud. Section 922 of Dodd–Frank established the Securities and Exchange Commission’s Office of the Whistleblower (OWB) and the Investor Protection Fund (SEC, 2017). This program incentivizes individuals to report information about securities laws violations in a timely manner. In 2017, the OWB received over 4,400 tips, which represents a 50% increase in tips from 2012, and paid out over $50 million in awards to 12 whistleblowers (SEC, 2017).

Further, the 2017 Annual Report to Congress on the Dodd–Frank Whistleblower Program (SEC, 2017) shows a general uptrend in award size as more fraud is uncovered and related actions are successful. However, despite the enormous number of tips, the quantity of awards granted annually tends to be rather low. Since the inception of the program in 2011 there have been 46 whistleblowers who received awards totaling about $160 million (SEC, 2017). This results in an average of only 6–7 whistleblowers receiving awards each year. The SEC specifically noted that the two largest awards to date ($83 million split between three whistleblowers in 2018 and $30 million paid to one whistleblower in 2014) were smaller than they would have been otherwise without unreasonable reporting delays to the Commission (SEC, 2014, 2018).

The Act itself fails to allude to any time limitations on making whistleblowing reports, although the commission may consider “additional relevant factors” when determining the award amount (U.S. House of Representatives, 2010). The whistleblowing provisions provided in Dodd–Frank assumed that individual reports of securities law violations would be made rather quickly. Yet, this assumption was not tested before Dodd–Frank was implemented. The more recent SEC reports made to congress (SEC 2015, 2016, 2017) about the whistleblower program now include factors that would decrease a whistleblower’s award.

Although the law was designed to hasten action from people interested in monetary rewards, among others, might it be influencing some to actually delay their reporting? Perhaps this is why the SEC is now more explicit about how awards are determined.

Factors that may decrease an award percentage include whether the whistleblower was culpable or involved in the underlying misconduct, interfered with internal compliance systems, or unreasonably delayed in reporting the violation to the Commission. (SEC, 2017)

Thus, even though the intent of the Act was clear, we wonder if there might be unanticipated consequences to when fraud reports are made. Because anyone in a white-collar setting might encounter fraud, or discussions of the type of fraud typically disclosed externally, we first ran an experiment on the white-collar business community. In the first experiment, this study tests the impact of Dodd–Frank on whistleblowing intentions on office workers and managers when the fraud itself is above and below the monetary sanction threshold to become eligible for a whistleblower award. Because the awareness of Dodd–Frank appeared to increase the intention of the participants to delay, we then conducted a series of open-ended interviews. We discovered that there appeared to be confusion about whether the amount of the fraud or the amount of the sanctions determined awards, even when presented with the whistleblowing provision from Dodd–Frank. Finally, we conducted a second experiment on the accounting community. As accountants are likely to be familiar with Dodd–Frank, and accountants are increasingly likely to detect the type of fraud, which might be reported, we tested the effect of providing clarifying information about the whistleblowing provisions within Dodd–Frank on the intention to report. This helps determine if the delay intention also held true when accountants were succinctly reminded of the whistleblowing provisions of Dodd–Frank.

This study investigates the influence of Dodd–Frank on the timing intentions of reporting this fraud externally. The study further examines the influence of the $1,000,000 Dodd–Frank award trigger threshold for monetary award eligibility on these timing intentions. This study primarily examines the effect upon external reporting rather than internal reporting to focus on the intentions of the Act. Additionally, because the internal reporting policies at each firm will likely differ substantially, participants may carry biases unknown to them into the experiment regarding their internal controls. However, the accountants in experiment two were also asked where they would report first and interesting results follow. The results indicate understanding of the Dodd–Frank Act influences when individuals choose to report fraud.

This study contributes to the whistleblowing research by examining the timing of intentions to report fraud. Given the new regulatory environment under Dodd–Frank, little research exists in the intervening years related to external whistleblowing. To date, no studies examine the interaction between fraud materiality and knowledge of Dodd–Frank in an environment where awards grow as the fraud grows. Additionally, within whistleblowing literature, few studies explore the gap between perceived regulatory knowledge and anti-regulatory behavior. Therefore, this study contributes to whistleblowing literature in meaningful ways. So informed, organizations can create more effective whistleblower policies and the SEC can consider actions to discourage delayed reporting.

The next section briefly discusses the background literature and develops hypotheses investigated in this study. Following this is a discussion of the experimental method and a presentation of the results. Finally, the paper concludes with a discussion of the results, contributions, limitations, and avenues for future research.

LITERATURE REVIEW

Fraud

Fraud in accounting literature, sets its roots in the Fraud Triangle (Cressey, 1953), which suggests opportunity, p...