Near and Miceli (1985, 4) define whistleblowing as “the disclosure by organization members (former or current) of illegal, immoral, or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action.'The decision to blow the whistle often presents an ethical dilemma for the whistleblower and depends on many factors that include differing perceptions of duties, loyalties, and obligations. Employees within an organization often feel a moral obligation to report wrongdoing and are more likely to do so when the work environment supports and encourages ethical behavior and whistleblowing (Alleyne, Hudaib, and Haniffa 2018). They must also consider the possible negative consequences of blowing the whistle, specifically retaliation and personal costs, as well as costs to the company involved.

Whistleblowing research is diverse and has expanded rapidly over the last decade. While multiple studies have investigated topics such as characteristics of the whistleblower, the wrongdoing, and the organization (see Gao and Brink [2017] for a review of this literature), we focus on the ethical considerations of the whistleblowing process. It is undeniable that accountants are in a unique position to both observe as well as take part in financial wrongdoing, as accountants within organizations provide crucial bookkeeping, auditing, taxation, and overall financial analysis services, while external auditors provide attestation services. The importance of whistleblowing is exemplified by multiple famous cases including Enron and WorldCom.

Analysis of the ethical aspects of whistleblowing is important, as accountants operate under the American Institute of Certified Public Accountants' (hereafter A1CPA) Code of Professional Conduct, which requires AICPA members to “discharge their responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public” (AICPA 2018, 5). The code also states that “The accounting profession’s public consists of clients, credit grantors, governments, employers, investors, the business and financial community” and “members may encounter conflicting pressures from each of those groups" (AICPA 2018, 5). Paeth (2013) suggests that conditions that warrant whistleblowing exist when the multiple loyalties an individual faces come into conflict with each other. In such circumstances, at least one loyalty may have to be sacrificed. Professional responsibilities are not unique to accountants, as many other professions also have a public interest emphasis, and within engineering, Bouville (2008) suggests that whistleblowing is mandatory for engineers whose code of the National Society of Professional Engineering has as its first canon duty' to the public. Extending this logic suggests that accountants should also have a duty' to report any observed misconduct given the emphasis on the public interest in the AICPA Code and similar codes of conduct for accountants (e.g., Institute of Management Accountants (hereafter IMA), Institute of Internal Auditors (hereafter IIA), Chartered Accountants Australia and New Zealand (hereafter CA ANZ), Institute of Chartered Accountants in England and Wales (hereafter ICAEW), etc.).

The remainder of the chapter is organized as follows: In the first section, we examine whistleblowing and its importance in accounting. Second, we explore the various reporting channels available for whistleblowers and under what conditions the various channels may be used. Third, we highlight ways that companies can encourage whistleblowing behavior in terms of both organizational and individual characteristics. Finally, we look at the ethical implications of the whistleblowing process by analyzing the impact of whistleblowing on the two primary parties affected: the whistleblower and the company involved.

Why is whistleblowing important for accounting?

Whistleblowing has been addressed in many different disciplines and contexts. This chapter addresses whistleblowing in the accounting context. Shareholders and other stakeholders make financial decisions based on financial statements, and thus it is imperative that the financial statements are not materially misstated. Understanding whistleblowing in the accounting context is therefore critical. Accountants and auditors effectively serve as corporate monitors and are often in a position to observe financial wrongdoing early in the process, when they can help minimize costs related to such frauds by blowing the whistle in a timely fashion (Seifert et al. 2010). According to its 2018 Global Study on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (hereafter ACFE) (2018), finds a direct and consistent relationship between fraud duration and median loss (associated with the fraud); frauds lasting over five years cost 20 times as much as frauds detected within the first six months.

Types of accounting-related misconduct that may warrant whistleblowing include many different egregious acts beyond fraud. Lee and Xiao (2018) identify 59 studies investigating accounting-related whistleblowing during their sample period of 1991 to 2017. Of these 59 studies, 40 included investigation of some sort of fraudulent act including misappropriation of assets, embezzlement, bribery, and corruption. However, the second most common type of whistleblowing investigated is violation of auditor independence and/or the Code of Professional Conduct (with ten studies included in their sample period), thus highlighting the importance of whistleblowing for accounting misconduct beyond fraud (Lee and Xiao 2018). One of the broadest studies on types of accounting misconduct and whistleblowing is Bowen, Call, and Rajgopal (2010). They investigate whistleblowing allegations against firms from 1989 through 2004 and identify overbilling, earnings management, price fixing, insider trading, tax fraud, and improper disclosure as specific types of accounting activities that necessitated whistleblowing. It is important to note that although fraud is often thought of as the most prominent type of accounting-related whistleblowing, accountants may certainly encounter other types of illegal, immoral, or illegitimate practices that may warrant blowing the whistle.

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