Evidence on the Use and Efficacy of Internal Whistleblowing Systems
44 Pages Posted: 29 Oct 2018 Last revised: 5 Dec 2018
Date Written: December 1, 2018
Using a proprietary dataset from the world’s largest provider of internal whistleblowing (WB) systems, also known as internal reporting systems, we examine the characteristics of firms that more actively utilize these 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. While larger firms tend to have more reports, firms that more actively use their systems (i.e., firms where more employees participate in reporting, where employees provide more information in their reports, and where management more frequently follows up on reports) are typically more profitable, older, and have fewer employees. Firms experiencing rapid growth, with evidence of earnings management, with weaker corporate governance, and with weaker internal controls are less likely to actively use their internal WB systems. Further, we find that more active use of internal WB systems is associated with fewer material lawsuits being filed against the firm and smaller settlement amounts. These findings are consistent with internal WB reports being a resource that helps management identify and address concerns before they become more costly to the firm, which is relevant to regulators as provisions in the Dodd-Frank Act incentivize WB reports directly to regulators, bypassing management.
Keywords: whistleblowing, employee hotlines, corporate governance, Sarbanes-Oxley Act, Dodd-Frank Act
JEL Classification: G38, G34, M48, M54
Suggested Citation: Suggested Citation