The Decline of Whistle-Blowing in the SOX Era

The National Bureau of Economic Research has found that 16% of "whistleblowers" of corporate fraud have been employees since 2002, down significantly from 21% during the 1996-2002 period. David Gebler of Working Values believes that although fraud "hotlines" are in place, that in the absence of a corporate culture committed to strong ethical values these hotlines offer illusory aid and may even be a source of retaliation. In a survey of larger businesses with corporate fraud, over 80% of whistleblowers reported resigning under pressure, being fired or being reassigned. In effect, the burden of fraud detection has moved to the auditor; 17% of fraud is caught by an auditor now vs. about 10% pre-SOX. Journalists, at 14%, are almost as effective in catching fraud as auditors while regulators badly trail both groups at 6%.

Several observations. First of all, in an environment where only reasonable assurance is possible, auditors have made admirable improvements in catching fraud since SOX (this finding in itself may be ammunition for the pro-SOX crowd). Secondly, anti-retaliation laws regarding whistle-blowing may need to be strengthened (and accounting organizations probably should revisit their stance on whistleblowing).