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Journal of Business Ethics
Published in: Journal of Business Ethics 2/2013

01-05-2013

Companies’ Use of Whistle-Blowing to Detect Fraud: An Examination of Corporate Whistle-Blowing Policies

Authors: Gladys Lee, Neil Fargher

Published in: Journal of Business Ethics | Issue 2/2013

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Abstract

In order to provide an effective whistle-blowing system, it is expected that companies would provide employees with a high level of disclosure regarding the whistle-blowing process. This study investigates variation in the extent of whistle-blowing disclosures. As a measure of whistle-blowing implementation, this study further examines the provision of a hotline channel. The results suggest that the extent of whistle-blowing disclosures is positively associated with the permissibility of anonymous reporting and organisational support for whistle-blowing, the number of external directors on the audit committee, and the existence of concentrated shareholdings. The mere existence of whistle-blowing disclosures could simply be symbolic. The findings also indicate a greater likelihood of the provision of hotlines when companies are larger in size, have a higher level of current inventory, are cross-listed in the US, and permit anonymous reporting.
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Footnotes
1
Combined Code on Corporate Governance, 2003.
 
2
Tabaksblat Code, 2005.
 
3
Code on Corporate Governance, 2004.
 
4
Section 9.4 AAA of the Corporations Act 2001.
 
5
There is also evidence from surveys that whistle-blowing systems have not been comprehensively implemented in all Australian companies (KPMG 2009; ACFE 2010).
 
6
For a more complete review of accounting research relevant to whistle-blowing, refer to Bedard et al. (2008).
 
7
Bowen et al. (2010) provide empirical evidence that firms subject to external financial whistle-blowing events experienced lower market-adjusted 5-day stock price reaction, more earnings restatements and shareholder lawsuits, and more negative future operating performance and stock return performance.
 
8
The whistle-blowing policies of the next 100 largest companies were also examined, and there were significantly less disclosures provided by these companies. As company size appeared to be the dominant determinant of non-disclosure the sample was restricted to the largest companies with a viable choice to implement and disclose a whistle-blowing system. Alternately using companies from only the larger S&P/ASX 100 index results in similar coefficient estimates, but are not statistically different from zero in this smaller sample.
 
9
The sample is larger than Hassink et al. (2007) which examined the whistle-blowing policies of 56 European companies and Singh (2006) which analysed 80 ethical codes of Canadian companies. The sample is slightly smaller than Beneish and Chatov’s (1993) study of 160 firms, and Calderón-Cuadrado et al. (2009) sample of 153 transnational companies.
 
10
A dollar is added to current inventory before taking the natural log where the value of inventory is zero.
 
11
The pseudo R 2 presented in the analysis is the Cox and Snell R 2. The Nagelkerke R 2 is 59.9 %.
 
12
We cannot tell whether some companies have whistle-blower policies not documented on their corporate website. Some companies were contacted but were not willing to provide further information.
 
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Metadata
Title
Companies’ Use of Whistle-Blowing to Detect Fraud: An Examination of Corporate Whistle-Blowing Policies
Authors
Gladys Lee
Neil Fargher
Publication date
01-05-2013
Publisher
Springer Netherlands
Published in
Journal of Business Ethics / Issue 2/2013
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-012-1348-9

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