Whistleblowers play an important role in the detection and deterrence of corporate fraud. In 2016, the Ontario Securities Commission (OSC) introduced a whistleblower program to combat securities violations such as insider trading and accounting fraud. Modelled after the U.S. securities regulator’s “bounty” program, the OSC initiative offers financial incentives to employees and others who provide original information that leads to a successful penalty or settlement, with rewards up to C$5 million. The OSC director of enforcement, Jeff Kehoe, recently called the program a “powerful enforcement tool”. School of Accounting and Finance (SAF) Professor Christine Wiedman chose to examine the U.S. experience, where the program has been in place since 2010, to assess costs and benefits of bounty whistleblower programs.
In a study recently published in Contemporary Accounting Research, she and her colleagues Vishal Baloria (Boston College) and Carol Marquardt (Baruch College) examine lobbying behaviour and stock market reaction around the introduction of the U.S. program. They find that over 250 companies lobbied against the rules, arguing that their internal reporting and compliance systems would be undermined and would prevent them from promptly investigating and correct internal wrong-doing on their own. However, the research shows that these lobbying companies had significantly weaker internal systems and more entrenched managers than other firms. They also find that stock prices of U.S. public companies went up significantly around the program introduction and adoption relative to Canadian and global benchmarks, evidence that markets expected net benefits for U.S. companies from this new enforcement tool.
In a current study, Professor Wiedman and SAF doctoral student, Chunmei Zhu, consider whether the SEC whistleblower program also deters future securities violation. They focus specifically on accounting fraud, examining a large sample of publicly traded U.S. companies subject to the rules. Their results show that aggressive financial reporting, an indicator of potential fraud, drops significantly in the years following the introduction of the SEC program. Further, these reductions are larger for firms with weaker internal systems prior to the introduction of the rules, likely because these firms are at greater risk of employees reporting directly to the regulator than reporting internally first.
Professor Wiedman’s findings highlight the important role that whistleblowers can play in the detection and deterrence of corporate fraud.
Vishal P. Baloria, Carol A. Marquardt and Christine I. Wiedman. 2017. A Lobbying Approach to Evaluating the Whistleblower Provisions of the Dodd-Frank Reform Act of 2010, Contemporary Accounting Research, 34 (3): 1305-1339.
Paper 2: Working paper