Incentivized Integrity Works!

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According to a new study by Jaron H. Wilde and other researchers at the University of Iowa, whistleblower-initiated investigations in the financial sector:

  • Decrease fraud and financial misconduct in organizations;
  • Increase monetary penalties for targeted firms and employees;
  • Result in longer prison sentences for culpable executives, and;
  • Get regulators moving more quickly to begin enforcement proceedings.

Whistleblowers and Outcomes of Financial Misrepresentation Enforcement Actions(link) looked at 317 public companies from 2003-2010, and found that accounting irregularities and other frauds significantly decreased after a whistleblower-initiated suit was settled. The study reports that penalized firms were “significantly more likely to experience a decrease in the incidence of accounting irregularities and a decrease in tax aggressiveness, compared with control firms.”

Wilde speculates that serious and significant whistleblower complaints may have a ripple effect inside a company, spreading a new culture of compliance-based attentiveness which is beneficial for both investors and the public at large:

"A complaint puts management on notice that a whistleblower has come forward, so they know it's possible they're going to be looked at more closely by the SEC or other federal regulatory agencies," Wilde says. "In theory, they react by engaging in less aggressive practices, and the evidence seems to validate that theory."

Mr. Wilde found that the decrease in bad behavior lasted at least two years, a period reflecting the data he had on the companies. Mr. Wilde said he had not yet examined whether corporate behavior change wears off after two years, but that it would be an interesting analysis to make.