The Effectiveness of an Internal Whistle-blowing System in Encouraging Internal Reporting of Financial Misconduct.

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 10: External and Internal Auditor Choice

Abstract

Whistle-blowing advocates suggest that establishing an internal whistle-blowing system is important to encourage internal reporting of concerns that can be addressed before external whistle-blowing becomes necessary. SOX (2002) requirements led to audit committees establishing systems for confidential submission by employees of concerns regarding questionable accounting or auditing matters. Most countries do not however mandate an internal whistle-blowing system. We therefore examine whether implementation of an internal whistle-blowing system encourages reporting of misconduct relative to companies without a whistle-blowing system. We find that a stronger corporate whistle-blowing system increases the likelihood that misconduct is reported. More importantly, we also find that a stronger corporate whistle-blowing system reduces the likelihood that misconduct is reported externally as compared to internally. Our results should be of interest to audit committees in the design of internal reporting systems to report financial misconduct.

Authors

• Neil L Fargher, Australian National University

• Gladys Lee, Australian National University