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Anonymous Whistle-Blowing Allegations Often Ignored

August 1 2010 - Research from the University of New Hampshire published in the Journal of Management Studies found that corporate directors responsible for internal whistle-blowing systems often take no action regarding anonymous allegations, even when they involve grave accounting breaches. However, in the case of otherwise identical non-anonymous allegations, audit committees trend to act promptly with significant resources allocated to the investigation. This study is the first to investigate this issue with practising audit committee members.

The researchers explain that public corporations in the U.S. are required to provide anonymous whistle-blowing channels to their employees. The intention is to increase reporting without fear of retaliation from management, thereby protecting shareholders from the consequences of fraudulent accounting and auditing. This study explores the operation and success of these whistle-blowing channels.

Analysis was based on responses from over eighty audit committee members from U.S. publicly- traded companies asked to assess and respond to whistle-blowing allegations from a variety of sources. Researchers found that anonymous allegations received very different treatment from non-anonymous reports. The former were largely ignored, particularly when the allegation threatened a senior manager's reputation. Researchers conclude that this failure in a potentially important strategy for addressing financial fraud highlights contraindications to directors serving on multiple corporate boards and suggests the need for an independent body to investigate whistle-blowing allegations.

Co-author and associate professor, Jake Rose, Ph.D. commented:

"We found that when an allegation poses a threat to a director's professional reputation, a form of distortion of information occurs. An audit committee has an incentive to not investigate the allegation when it creates a reputation threat, and this causes the committee member to believe the allegation is less credible. Our presumption is that most corporate managers, auditors, and corporate directors are honest and ethical people. However, under certain circumstances, 'good' people can engage in 'bad' behavior.



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