Evidence on the Use and Efficacy of Internal Whistleblowing Systems
55 Pages Posted: 29 Oct 2018 Last revised: 1 May 2019
Date Written: April 29, 2019
Using a proprietary dataset from a provider of internal whistleblowing (WB) systems, we analyze nearly two million internal reports submitted to over one thousand publicly traded U.S. firms. We provide descriptive statistics, over time and across report types, on the individuals making reports, the amount and summary details of information provided, how extensively management reviews reports, the amount of time until reviews were completed, and the outcome of these reviews. Further, we examine the characteristics of firms with more actively used systems. Although internal WB systems have been required for public firms in the U.S. since the Sarbanes-Oxley Act, we find substantial variation in their use. Firms with more actively used systems (i.e., more employees participate in reporting, employees provide more information in reports, and management reviews reports more frequently) are typically more profitable, more geographically disperse, and have fewer employees. Firms experiencing rapid growth, with evidence of earnings management, and with weaker corporate governance are less likely to have actively used internal WB systems. Further, we find that higher internal WB report volume is associated with fewer and lower amounts of government fines and material lawsuits. These findings are consistent with internal WB reports being a resource that deters against inappropriate behavior and helps management identify and address concerns before they become more costly to the firm.
Keywords: whistleblowing, employee hotlines, corporate governance, Sarbanes-Oxley Act
JEL Classification: G38, G34, M48, M54
Suggested Citation: Suggested Citation