Topic: Discourse on Whistleblower Protection and COVID-19 (A Literature Review)
“If you’re going to sin, sin against God, not the Bureaucracy.
God will forgive you but the Bureaucracy won’t.”
Admiral Hyman G. Rickover
- INTRODUCTION
Leadership incompetence and apathy among members of a democratic society are the bane of good corporate governance. Moreover, autocracy and rigidity of management process in bureaucracies limit involvement of employees in decision-making[1]. This gags employees from sharing their concerns about perceived or actual wrongdoing, thus, creating room for unethical and illegal practices. According to the 19th century British politician Lord Acton, “Power corrupts, and absolute power corrupts absolutely.” Every responsible government should therefore provide motivational tools—such as monetary rewards and protection—for employees to effectively act towards promoting moral values and preserving accountability and probity.
On this backdrop, evidence-based reports on COVID-19 management in the United Kingdom and USA indicate widespread corruption and fraud. But whistleblowing activities against government contractors, financial institutions, government agencies, multinational corporations and other powerful organizations harming public health, safety and security with corrupt practices highlight employees’ level of awareness and the commitment to achieve good corporate governance. Therefore, any employee who blows the whistle without fear of retaliation and mistreatment—contrary to Admiral Hyman G. Rickover’s statement which immortalises bureaucracies and threatens whistleblowers—should be handsomely rewarded to encourage others.
A whistleblower is someone who divulges information about wrongdoing. The act of whistleblowing is also known as “making a disclosure” and is usually—but not necessarily—about illegal or unethical practices witnessed at work. But to gain protection from the Whistleblower Act (2017), anyone making a disclosure must prove, beyond reasonable doubts, that the action is hinged on protecting public interest. This implies that personal grievances and complaints don’t fall under areas covered by whistleblowing law. Basically, a whistleblower has to ensure that the disclosure exposes past and present wrongdoings which may likely occur in the future within the following categories: (a) miscarriages of justice (b) disobedience to lawfully constituted authorities (c) negligence of obligations set out in the law (d) criminal offenses which may include financial fraud and bribery (e) and abetting wrongdoing in the above categories.
- ANALYSIS OF RELEVANT LITERATURES
2.1 Scheetz A M and Wall J “Making Crime Pay: Timing of External Whistleblowing” 2019
Dr Joseph Michael Wall (a professor of Accounting who joined Marquette University in 2015) and co-author Scheetz Andrea M., who holds a PhD. in Management (Accountancy) and lectures at Case Western Reserve University, USA, examined the relevance of employees’ understanding of the Whistleblower Act, particularly the time gap between discovery of fraud and external reporting[2]. The scholars relied on the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act to analyse circumstances under which employees are eligible for rewards after exposing wrongdoing to the Securities and Exchange Commission (SEC). The research by Scheetz and Wall was inspired by a 2018 report from the Association of Certified Examiners (ACFE) which collaborated claims that fraud-related cases increased significantly between 2015 and 2016 as stated in the 2017 Global Fraud Survey of Certified Fraud Examiners.
On this backdrop, the Whistleblower Protection Act (2017) was promulgated to regain public trust, especially when it comes to investigating large-scale fraud. The statute has—to some extent—ensured accountability and probity in both public and private enterprises. Basically, Section 922 of Dodd-Frank established the Investor Protection Fund (IPF) and Securities & Exchange Commission’s Office of the Whistleblower (OWB) to enhance prosecution of wrongdoers as well as encourage individuals to step up and report wrongdoing in a timely manner. In 2017, SEC presented a yearly report to Congress on the Dodd-Frank Whistleblower Program, noting that a total of 46 whistleblowers received $160 million as reward between 2011 and 2017. Despite this huge amount awarded to encourage whistleblowing activities, the number of reported cases of fraud is quite low. However, Scheetz and Wall commended the Act for closing the time gap between when fraud was noticed and when a disclosure was made, although the commission has a right to consider “some relevant factors” when making decisions on what amount should be awarded to whistleblowers. But a major flaw of whistleblowing provisions in Dodd-Frank is the assumption that disclosures on securities law violations are usually made faster. Moreover, U.S. lawmakers failed to test this assumption before implementing Dodd-Frank. Unfortunately, the 2017 SEC report to Congress included clauses that may significantly limit the value of financial rewards to whistleblowers. This is contrary to the main objective of Dodd-Frank which is to encourage whistleblowing with attractive compensations. Scheetz and Wall investigated whether financial rewards might be discouraging people from making disclosures.
Perhaps, this debate on the relevance of compensations is why the SEC—since 2014, when it awarded three whistleblowers with a whopping $83 million—has been more explicit about how financial rewards are calculated. In line with Dodd-Frank provisions, individuals assisting the authorities to recover at least $1 million are entitled to 10-30% reward although this compensation applies only to employees in the financial sector—not all sectors of the economy. The reward percentage is, however, determined by whether making a disclosure was culpable or involved in the wrongdoing, for example, by interfering with internal compliance systems or purposely delaying the time of reporting violation to the Commission. The scholars tested the impact of Dodd-Frank on whistleblowing intentions—especially when the fraud is below or above the monetary sanction threshold which makes individuals eligible for financial rewards. They also examined whether there should be some unexpected consequences for delayed reporting of fraud to SEC[3].
Findings from Scheetz and Wall show that knowledge and understanding of the Dodd-Frank Act increase whistleblowing intentions among individuals and, to a great extent, influence their decision to delay reporting. However, a major discovery in the research is that employees are confused on whether SEC uses the amount of fraud or amount of sanction to calculate financial rewards. Results from open-ended interviews with accountants/auditors who are conversant with Dodd-Frank show they are more likely to detect fraud which might be reported for huge compensations. Thus, Dodd-Frank/s $1,000,000 threshold for monetary award eligibility has significant influence on timing intention. But the attractiveness of whistleblowing under the Act tends to encourage external reporting rather than internal reporting therefore reporting intentions are mostly hinged on compensation. This raises the question of bias. Additionally, organizations have different internal reporting policies so whistleblowers may unknowingly infuse their personal grievances against internal control structures while making reporting a wrongdoing.
2.2 Moore M A, Huxford J and Bethmann J B “National Security Whistleblowers and the Journalists Who Tell Their Stories: A Dangerous Policy Dance of Truth-finding, Truth-telling, and Consequence 2017
In this book, the authors acknowledged that whistleblowers are a crucial part the media’s commitment to achieving accountability in corporate governance, adding that whistleblowers provide checks and balances against those who wield power and exploit it for selfish reasons[4]. Using examples of individuals/organizations who have defrauded the government in recent years, the scholars investigated circumstances under which fraud was committed—and discussed the legal and political consequences of such breaches. But the ignored the role of effective whistleblower protection and rewards—except the recommendation that an effective whistleblower protections mechanism should for instituted for National Security employees. More importantly, the scholars suggested huge benefits for individuals blowing the whistle to control corrupt public office holders and management of private establishment. Yet, the focus on corrupt politicians provided a one-sided analysis.
Basically, the researchers examined the level and frequency of corruption among U.S. politicians, with focus on the negative impact of political stability and public policy on citizens who the politicians/public officials were elected/appointed to serve. Results from the analysis of America’s three-tier government therefore highlight the need to control and investigate public officials who misuse their positions of authority. To achieve this corporate governance objective, the authors suggested use of modern tools for enforcing accountability, thus, highlighting the ethical responsibility and power of the people to monitor their leaders, identify wrongdoing, and take timely action to fight corruption in governance.
2.3 Mintz S “Whistleblowing Considerations for External Auditors under Dodd-Frank: A Blueprint for Future Research” 2015
Congress enacted Dodd-Frank on 5 January, 2010. The statute was eventually implemented on 12 August, 2011 and has set new disclosure standards for both internal and external auditors by ensuring that fraud-related issues are resolved internally between employees and top management. Moreover, the Act changed U.S. regulatory landscape by empowering internal accountants, external auditors and auditing firms to safeguard whistleblower rights thereby motivating individuals to “voluntarily” report wrongdoing to SEC. Information leading to a successful enforcement proceeding on a violation of federal securities law—in line with the United States Code (78a) and Section 21F of the Securities Exchange Act of 1934—must attract monetary sanction of more than $1 million. Dodd-Frank defined a whistleblower as any individual who voluntarily alerts SEC of wrongdoing that has occurred, is ongoing, or about to occur. However, Mintz Stephen notes that the verifiable report must be from whistle-blowers’ independent observation/analysis and not information collated from a government report, judicial/court proceeding, administrative hearing or investigation[5].
Mintz found the American Institute of Certified Public Accountants (AICPA) altered “Interpretation 102-4” of the Integrity and Objectivity rule in the AICPA Code of Professional Conduct (commonly known as AICPA Code) to contain process to be observed by external auditors when making decision on whether to make a disclosure against their employers (audit firms) for not acting fast to resolve grievances on accounting and financial reporting matters with clients. In its response to the whistleblowing provisions of Dodd-Frank, AICPA included external auditors in a legal process that previously allowed only internal accountants access to Rule 102 of the AICPA Code, which provides guidance to potential whistleblowers. But the major problem is how employees of an accounting company can provide auditing services to public organizations/institutions without blowing whistle on the company for disregarding legal and ethical practices. As outlined in the securities law, accountants under this circumstance, thus, have a responsibility to unlawful conducts—especially financial fraud. But rigorous whistleblowing provisions in Dodd-Frank such as the clause on Interpretation 102 created a gap in the relationship between auditors and their employers (audit firms)
The main objectives of the study by Mintz are: (a) To understand new requirements under the Dodd-Frank Act which laid conditions for external auditors to report unethical and illegal practices to SEC because top management could not resolve fraud-related issues; and (b) to review the Interpretation Code 102-4 which sets the new relationship standards between employers (auditing firms) and external auditors regarding whistleblowing obligations. Further, the scholar elaborated on the characteristics of a whistleblower, Dodd-Frank process for making a disclosure, and whistleblowing responsibilities for every organization—especially the relationships with external auditors. A major aspect of the study is the analysis of auditors’ integrity standards under AICPA Interpretation 102-4 which explains how they avoid subordination of judgment while carrying out their duties in the context of individual responsibility, moral autonomy, and whistleblowing obligation. Findings show that one commonly cited cause of unethical conducts in organizations is the pressure on employees to do “whatever it takes” to increase profits and achieve sustainable competitive advantage. Additionally, employees are usually rewarded for results, with the conviction that “the end justifies the means.” Despite the Mintz’s laudable recommendations, the study was flaws for excluding the Sarbanes Oxley Act (SOX) which is considered the most effective anti-retaliatory whistleblower provisions in the world. The literature will be fully discussed subsequently.
[1] Wall, J. and Gissel, J. (2019). Board of Directors’ Sanction Judgments: The Effect of Situational Factors. Journal of Managerial Issues. 31(1): 85-112.
[2] Scheetz A M and Wall J “Making Crime Pay: Timing of External Whistleblowing” 2019 Baker C R (eds) Research on Professional Responsibility and Ethics in Accounting (22) 1-30
[3] Suh, I., Sweeney, J., Linke, K., and Wall, J. (2018). Boiling the Frog Slowly: The Immersion of C-Suite Financial Executives into Fraud. Journal of Business Ethics. Published online 2018. 1-29. Print: 2020, 162: 645-673
[4] Moore M A, Huxford J and Bethmann J B “National Security Whistleblowers and the Journalists Who Tell Their Stories: A Dangerous Policy Dance of Truth-finding, Truth-telling, and Consequence, Corruption, Accountability and Discretion 2017 Public Policy and Governance (29) 227-246
[5] Mintz S “Whistleblowing Considerations for External Auditors under Dodd-Frank: A Blueprint for Future Research” 2015 Journal of Professional Responsibility and Ethics in Accounting (19) 99-128
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