Monday, August 16, 2010

Anonymous Reporting ... Common, But Effective?

A company looking to establish "best-practices" FCPA policies and procedures will often implement anonymous reporting mechanisms so that employees and others can report misconduct that may violate the Foreign Corrupt Practices Act or company policy.

The conventional wisdom (see here for example) is that such anonymous reporting mechanisms are effective because, among other things, they remove the stigma of reporting misconduct.

Anonymous reporting is common, but is it effective?

That is question asked by James Hunton (Bently College - see here) and Jacob Rose (University of New Hampshire - see here) in a recently published study in the Journal of Management Studies titled: "Effects of Anonymous Whistle-Blowing and Perceived Reputation Threats on Investigations of Whistle-Blowing Allegations by Audit Committee Members."

The answer according to Hunton and Rose?

No it isn't.

Here is the abstract of the paper.

"A total of 83 experienced audit committee members participated in an experiment in which they evaluated the credibility of and allocated investigative resources towards a whistle-blowing allegation of financial reporting malfeasance by corporate executive officers. We manipulated whether the whistle-blowing allegation was made through anonymous or non-anonymous channels and whether the allegation posed a relatively high or low threat to the personal reputation of the audit committee member who was charged with investigating the allegation. Results indicate that the participating audit committee members attributed lower credibility and allocated fewer investigatory resources when the whistle-blowing report was received through an anonymous versus non-anonymous channel, and when the allegation posed a relatively high versus low level of reputation threat. While the Sarbanes–Oxley Act of 2002 requires audit committees of publicly traded firms to provide an anonymous whistle-blowing channel to employees, our findings suggest disturbing unintended consequences of such regulation; specifically, audit committee members might fail to sufficiently investigate whistle-blowing allegations received through anonymous whistle-blowing channels, particularly if the allegation poses a personal reputation threat."

As noted by the authors, the study "is the first to examine whether and how anonymous whistle-blowing affects corporate directors who are charged with determining the veracity of such allegations" and the study questions "whether anonymous whistle-blowing improves the quality of corporate governance ..."

1 comment:

  1. Thank you for the post. As an anti-corruption practitioner and researcher (and a chronic whistle-blower) I always knew that: 1) effective whistle-blowing is hard on whistle-blowers and 2) overall, it is hardly effective.

    Hunton & Rose supply another bit of convincing proof that encouraging whistleblowing is not the greatest of strategies for elimination of corruption and other social ills.

    Besides, thanks for making your blog into the hub of FCPA and corruption-related info. Impressive writing, too.

    Andrei Vorobiev