Do the SEC Whistleblower Provisions of Dodd Frank Deter Aggressive Financial Reporting?

51 Pages Posted: 28 Jan 2018  

Christine I. Wiedman

University of Waterloo

Chunmei Zhu

University of Waterloo - School of Accounting and Finance

Date Written: November 2017

Abstract

The stated goal of the 2011 SEC Whistleblower (WB) Program introduced as part of the Dodd-Frank Act was to strengthen investor protection through greater deterrence of securities law violations and more effective regulatory enforcement. While the SEC has articulated the success of the program for detecting and prosecuting violations, there is no evidence on the effect of the program in deterring violations. In this paper, we consider the deterrent effect by examining the impact of the Program on aggressive financial reporting by U.S. firms. Despite ongoing challenges, including the high number of tips received and efforts by some managers to circumvent the new rules by muzzling whistleblowers, we document a significant reduction in abnormal accruals following the introduction of the regulation. In a difference-in-differences design, we also find that reductions in aggressive reporting are significantly greater for U.S. firms than for Canadian firms. Using a sample of firms with ratings of internal reporting program quality just prior to the introduction of WB Program, we find that reductions in aggressive reporting are greater for firms with weaker internal programs. We also find that the reporting of internal control weaknesses decreased significantly in the years following the introduction of the Program. Collectively, these findings provide important evidence of significant benefits of the SEC WB Program of Dodd-Frank Act for deterring financial reporting fraud.

Keywords: Whistleblower, Dodd Frank, Fraud, Financial Reporting

JEL Classification: M41, G18

Suggested Citation

Wiedman, Christine I. and Zhu, Chunmei, Do the SEC Whistleblower Provisions of Dodd Frank Deter Aggressive Financial Reporting? (November 2017). Available at SSRN: https://ssrn.com/abstract=3105521 or http://dx.doi.org/10.2139/ssrn.3105521

Chunmei Zhu

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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