Do Corporate Whistleblower Laws Deter Accounting Fraud?
68 Pages Posted: 25 Oct 2017 Last revised: 22 Mar 2019
Date Written: March 18, 2019
We examine the deterrence effect of whistleblower laws on accounting fraud. We exploit state False Claims Acts (FCAs), under which reporting fraud at a firm invested in by a state's pension fund can result in monetary rewards from that state’s government. Using staggered adoption of FCAs between 2001 and 2010, we compare the accounting fraud probability of firms owned by state pension funds after FCA adoption in the state to that of firms not exposed to any state’s FCA. We find that firms' exposure to FCAs reduces the likelihood of accounting fraud by 5% to 9%. Consistent with the reduced likelihood of fraud lowering the risks of auditing the affected firms, audit fees are 4.5% to 6% lower after a firm is exposed to state FCAs relative to firm-years not treated. Conversely, we find little evidence consistent with increased investment in internal auditing being a mechanism by which whistleblowing exposure lowers fraud risk. Finally, we find the introduction of the Dodd-Frank whistleblower provision in 2011 reduced the probability of accounting fraud to a greater extent for firms that had not been affected previously by state FCAs, corroborating the deterrence effect of the state and federal whistleblower laws.
Keywords: Whistleblowing; Fraud; Internal Controls; False Claims Act; Dodd-Frank Act
JEL Classification: G34; G38; K22; M41; M48
Suggested Citation: Suggested Citation