Skip to main content
Disciplines
Automotive Business IT + Informatics Construction + Real Estate Electrical Engineering + Electronics Energy + Sustainability Insurance + Risk Finance + Banking Management + Leadership Marketing + Sales Mechanical Engineering + Materials
Events
DE
EN
Books
Journals
Topic Page
Marketing
Start single access now
Access for companies
EXTENDED SEARCH
Log in
Top
Journal of Business Ethics
Published in: Journal of Business Ethics 2/2016

08-05-2015

Detecting Fraud: The Role of the Anonymous Reporting Channel

Authors: Elka Johansson, Peter Carey

Published in: Journal of Business Ethics | Issue 2/2016

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

The purpose of this paper is to examine whether anonymous reporting channels (ARCs) are effective in detecting fraud against companies. Fraud, which comprises predominantly asset misappropriation, represents a key operational risk and a major cost to organisations (ACFE, http://​www.​acfe.​com/​uploadedFiles/​ACFE_​Website/​Content/​rttn/​2012-report-to-nations.​pdf, 2012; KPMG, http://​www.​kpmg.​com/​AU/​en/​IssuesAndInsight​s/​ArticlesPublicat​ions/​Fraud-Survey/​Documents/​fraud-bribery-corruption-survey-2012v2.​pdf, 2012). The fraud triangle (incentives, opportunities and attitudes) provides a framework for developing our understanding of how ARCs can increase detection of fraud. Using publicly listed company survey data collected by KPMG in Australia—where ARCs are not mandated—we find a positive association between ARCs and reported fraud. These results indicate that ARCs are effective in detecting fraud. Additional analysis reveals that small firms derive the greatest benefit from adopting ARCs. We also find that independent boards do not directly influence the detection of fraud, but companies with independent boards detect more fraud because they implement ARCs.
previous article The Association Between Gender-Diverse Compensation Committees and CEO Compensation
next article Political Connectedness, Corporate Governance, and Firm Performance

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

inform now
Footnotes
1
Part 9.4 AAA of the Act provides some protection for whistleblowers (Corporations Act 2001 (Cwlth)).
 
2
Lee and Fargher (2013) similarly argue that the voluntary environment in Australian provides an opportunity to investigate the determinants of whistleblowing policy disclosures in the absence of a requirement for firms to adopt a whistleblowing policy.
 
3
The term empirical refers to research that collects data using primarily archival or survey methodology.
 
4
The incidence of reported fraud in firms with ARCs is not presented in the 2004, 2008 and 2010 KPMG Fraud Survey reports.
 
5
A limitation of these descriptive analyses is that they do not control for other factors associated with fraud detection.
 
6
The KPMG Fraud Survey is a biennial survey of fraud self-reported by Australian and New Zealand organisations since the early 1990s. The survey examines the extent and nature of fraud of public and private sector organisations. The latest KPMG Fraud Survey is available at http://​www.​kpmg.​com/​AU/​en/​IssuesAndInsight​s/​ArticlesPublicat​ions/​Fraud-Survey/​Pages/​fraud-bribery-corruption-survey-2012.​aspx.
 
7
Chapple et al. (2009) and Coram et al. (2008) use the 2004 KPMG Fraud Survey data in their published studies. To the authors’ knowledge, no published studies have used the 2006, 2008 or 2010 KPMG Fraud Survey data.
 
8
Annual reports were obtained from the ASX website. Corporate governance items and other control variables were collected from the 2004, 2006, 2008 and 2010 annual reports.
 
9
The 133 firms that did not report fraud may have experienced undetected fraud.
 
10
The KPMG surveys cover four separate survey periods (i.e. 2004 survey captures the period from 1 April 2002 to 31 March 2004; 2006 survey captures the period from 1 April 2004 to 31 January 2006; 2008 survey captures the period from 1 February 2006 to 31 January 2008; 2010 survey captures the period from 1 February 2008 to 31 January 2010).
 
11
The KPMG Fraud Survey asks respondents “are you aware of fraud occurring in your organisation during [the survey period]?” (i.e. see question 4.1 of the 2010 KPMG Fraud Survey).
 
12
The KPMG Fraud Survey asks respondents “what avenues are available for the reporting of fraud?” and respondents are asked to tick a box indicating whether the avenue allows for anonymous reporting, regardless of whether the avenue is a hotline, email, fax or dropbox, or whether the avenue is internal or external to the organisation (i.e. question 3.2 of the 2010 KPMG Fraud Survey).
 
13
As board (audit committee) size was skewed, we used the natural logarithm of board (audit committee) size in principal component analysis.
 
14
The proportion of non-executive directors on the audit committee and board includes both independent and non-independent non-executive directors.
 
15
For the 17 firms that did not have an audit committee, a value of zero was assigned for the various audit committee characteristics reflected in principal components 1 and 2.
 
16
Whether a firm has a whistleblowing policy may also affect the incidence of reported fraud. However, of the 231 companies in the sample, 153 did not clearly state in their annual reports whether they had whistleblowing policies. Thus, we were unable to include this variable in our analysis.
 
17
Of the 129,266 instances of fraud reported, more than 99 % related to asset misappropriation. Of the remaining fraud incidences, 12 were incidences of corruption and 52 were incidences of financial statement fraud.
 
18
The sample size in Chapple et al. (2009) is 115 Australian and New Zealand publicly listed companies which responded to the 2004 KPMG Fraud Survey. Our study includes 84 respondents and excludes five New Zealand publicly listed companies, three Australian companies that were delisted during the survey period, ten Australian publicly listed companies with missing annual report data and 13 Australian publicly listed companies with missing survey data.
 
19
These results contrast with Chapple et al. (2009), who found a negative association between the proportion of independent directors on the audit committee and asset misappropriation, and non-significant associations with all other variables measuring independence in their model. While Chapple et al. (2009) used the 2004 KPMG Fraud Survey data, the present study includes data from the 2004, 2006, 2008 and 2010 KPMG Fraud Surveys.
 
20
The pseudo R 2 presented in the analysis is the Cox and Snell R 2. The Nagelkerke R 2 is 37.1 %.
 
21
We remove the 15 firms that reported corruption and/or financial statement fraud in addition to asset misappropriation and re-estimate the logistic regression model, ARC remains significant at the 5 % level.
 
22
The KPMG Fraud Survey asks respondents “how many fraud incidents in total were detected in that period?” (i.e. question 4.2 of the 2010 KPMG Fraud Survey).
 
23
This is not consistent with descriptive statistics that indicated significant differences in corporate governance practices between firms that reported fraud and firms that did not report fraud. After controlling for firm characteristics (i.e. firm size, leverage, industry), corporate governance characteristics are not significant in the regression analysis.
 
24
We estimate 11 separate regression models including the individual corporate governance items that comprise INDEPENDENCE and EXPERTISE one at a time. ARC remains significant at the 5 % level in the 11 logistic regression models. After controlling for firm characteristics in the regression analyses, 10 of the 11 governance items are not significant. FINEXPBOARD (proportion of financial experts on the board) is the only item that, when added individually, is associated with fraud, although the influence is marginal.
 
25
Although the KPMG Fraud Survey asks respondents to provide the number of employees in their firms, 49 respondents in the sample did not provide this information. To ensure that results were robust to using the natural logarithm of number of employees as an alternate proxy for firm size, we remove the observations with missing employee data and re-estimate the regression analysis. Results are qualitatively similar with ARC positively associated with fraud in a one tailed test.
 
26
Small firms (n = 115) had a mean market capitalisation of $99.242 million, a median of $79.600 million and standard deviation of $84.580 million (natural logarithm of market capitalisation \(\bar{x}\)  = 3.978, Md = 4.380, s = 1.357) and large firms (n = 116) had a mean market capitalisation of $6505.900 million, a median of $1678.350 million and standard deviation of $19,219.568 million (natural logarithm of market capitalisation \(\bar{x}\)  = 7.540, Md = 7.425 and s = 1.391).
 
27
The KPMG Fraud Survey asks respondents “How long did the fraud continue before being detected?” (i.e. question 5.1 of the 2010 KPMG Survey).
 
28
Late respondents are considered to be similar to non-respondents (Oppenheim 1996).
 
29
Thirty-three firms completed the KPMG Fraud Survey twice (33 observations), eight firms completed the KPMG Fraud Survey thrice (16 observations) and one completed the KPMG Fraud Survey in all survey periods (i.e. 2004, 2006, 2008 and 2010 Surveys) (3 observations).
 
30
After excluding repeat respondents, there were 84 firms that completed the 2004 KPMG Fraud Survey, 40 firms that completed the 2006 KPMG Fraud Survey, 45 firms that completed the 2008 KPMG Fraud Survey and 10 firms that completed the 2010 KPMG Fraud Survey.
 
31
We also find EXPERTISE to be positively associated with fraud in the 2004 subsample, but negatively associated with fraud in the non-2004 subsample. Firms with financial and risk expertise on boards (subcommittees) were more likely to detect fraud in 2004, but less likely to detect fraud after 2004.
 
32
An analysis of firms in our sample indicate, as expected, that compared to large firms, small firms have less independent boards (audit committees), (small firm \(\bar{x}\)  = −0.528, large firm \(\bar{x}\)  = 0.524, p value < 0.0005) and are less likely to have a code of ethics (small firm \(\bar{x}\)  = 0.713, large firm \(\bar{x}\)  = 0.940, p value < 0.0005).
 
Literature
Arnold, D. F., & Ponemon, L. (1991). Internal auditors’ perceptions of whistle-blowing and influence of moral reasoning: An experiment. Auditing: A Journal of Practice and Theory, 10(2), 1–15.
Ayers, S., & Kaplan, S. E. (2005). Wrongdoing by consultants: An examination of employees’ reporting intentions. Journal of Business Ethics, 57, 121–137.CrossRef
Barnett, T. (1992). A preliminary investigation of the relationship between selected organizational characteristics and external whistleblowing by employees. Journal of Business Ethics, 11, 949–959.CrossRef
Baron, R. M., & Kenny, D. A. (1986). The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173–1182.CrossRef
Beasley, M. S., & Salterio, S. E. (2001). The relationship between board characteristics and voluntary improvements in audit committee characteristics. Contemporary Accounting Research, 18, 539–570.CrossRef
Bierstaker, J. L., Brody, R. G., & Pacini, C. (2006). Accountants’ perceptions regarding fraud detection and prevention methods. Managerial Auditing Journal, 21, 520–535.CrossRef
Cassematis, P. G., & Wortley, R. (2013). Prediction of whistleblowing or non-reporting observation: The role of personal and situational factors. Journal of Business Ethics, 117, 615–634.CrossRef
Chapple, L., Ferguson, C., & Kang, D. (2009). Corporate governance and misappropriation. Journal of Forensic and Investigative Accounting, 1(2), 1–26.
Chin, W. W. (1998). The partial least squares approach to structural equation modelling. In G. A. Marcoulides (Ed.), Modern methods for business research (pp. 295–336). Mahwah, NJ: Lawrence Erlbaum Associates.
Chin, W. W., & Newsted, P. R. (1999). Structural equation modelling analysis with small samples using partial least squares. In R. H. Hoyle (Ed.), Statistical strategies for small sample research (pp. 307–342). Thousand Oaks, CA: Sage.
Chiu, R. K. (2003). Ethical judgment and whistleblowing intention: Examining the moderating role of locus of control. Journal of Business Ethics, 43, 65–74.CrossRef
Coram, P., Ferguson, C., & Moroney, R. (2008). Internal audit, alternative internal audit structures and the level of misappropriation of assets fraud. Accounting and Finance, 48, 543–559.
Corporations Act 2001 (Commonwealth of Australia). Part 9.4AAA.
Cressey, D. R. (1973). Other people’s money: A study in the social psychology of embezzlement. Montclair: Patterson-Smith.
Cronbach, L. J. (1951). Coefficient alpha and the internal structure of tests. Psychometrika, 16, 297–334.CrossRef
Curtis, M. B., & Taylor, E. Z. (2009). Whistleblowing in public accounting: Influence of identity disclosure, situational context, and personal characteristics. Accounting and the Public Interest, 9, 191–220.CrossRef
Dozier, J. B., & Miceli, M. P. (1985). Potential predictors of whistle-blowing: A prosocial behavior perspective. Academy of Management Review, 10, 823–836.
Dyck, A., Morse, A., & Zingales, L. (2010). Who blows the whistle on corporate fraud? The Journal of Finance, 65, 2213–2253.CrossRef
Gao, J., Greenberg, R., & Wong-On-Wing, B. (2015). Whistleblowing intentions of lower-level employees: The effect of reporting channel, bystanders, and wrongdoing. Journal of Business Ethics, 126, 85–99.
Goodwin-Stewart, J., & Kent, P. (2006). The use of internal audit by Australian companies. Managerial Auditing Journal, 21, 81–101.CrossRef
Graham, J. W. (1986). Principled organizational dissent: A theoretical essay. In I. I. Cummings & B. M. Staw (Eds.), Research in organizational behavior (Vol. 8, pp. 1–52). Greenwich, CT: JAI Press.
Hooks, K. L., Kaplan, S. E., & Schultz, J. J., Jr. (1994). Enhancing communication to assist in fraud prevention and detection. Auditing: A Journal of Practice and Theory, 13(2), 86–117.
Kaplan, S., Pany, K., Samuels, J., & Zhang, J. (2009a). An examination of the association between gender and reporting intentions for fraudulent financial reporting. Journal of Business Ethics, 87, 15–30.CrossRef
Kaplan, S. E., Pany, K., Samuels, J. A., & Zhang, J. (2009b). An examination of the effects of procedural safeguards on intentions to anonymously report fraud. Auditing: A Journal of Practice and Theory, 28(2), 273–288.CrossRef
Kaplan, S. E., Pope, K. R., & Samuels, J. A. (2010). The effect of social confrontation on individuals’ intentions to internally report fraud. Behavioral Research in Accounting, 22(2), 51–67.CrossRef
Kaplan, S. E., & Schultz, J. J. (2007). Intentions to report questionable acts: An examination of the influence of anonymous reporting channel, internal audit quality and setting. Journal of Business Ethics, 71, 109–124.CrossRef
Kaplan, S. E., & Whitecotton, S. M. (2001). An examination of auditors’ reporting intentions when another auditor is offered client employment. Auditing: A Journal of Practice and Theory, 20(1), 45–63.CrossRef
Kaptein, M. (2011). From inaction to external whistleblowing: The influence of the ethical culture of organizations on employees’ responses to observed wrongdoing. Journal of Business Ethics, 98, 513–530.CrossRef
Keenan, J. P. (1990). Upper-level managers and whistleblowing: Determinants of perceptions of company encouragement and information about where to blow the whistle. Journal of Business and Psychology, 5, 223–235.CrossRef
Keenan, J. P. (1995). Whistleblowing and the first-level manager: Determinants of feeling obliged to blow the whistle. Journal of Social Behavior and Personality, 10, 571–584.
Keenan, J. P. (2000). Blowing the whistle on less serious forms of fraud: A study of executive and managers. Employee Responsibilities and Rights Journal, 12, 199–217.CrossRef
King, G. (1999). The implications of an organisation’s structure on whistleblowing. Journal of Business Ethics, 20, 315–326.CrossRef
Krishnan, J. (2005). Audit committee quality and internal control: An empirical analysis. The Accounting Review, 80, 649–675.CrossRef
Kuntz, J. R. C., Kuntz, J. R., Elenkov, D., & Nabirukhina, A. (2013). Characterizing ethical cases: A cross-cultural investigation of individual differences, organisational climate, and leadership on ethical decision-making. Journal of Business Ethics, 113, 317–331.CrossRef
Lee, G., & Fargher, N. (2013). Companies’ use of whistle-blowing to detect fraud: An examination of corporate whistle-blowing. Journal of Business Ethics, 114, 283–295.CrossRef
Lowe, D. J., Pope, K. R., & Samuels, J. A. (2014). An examination of financial sub-certification and timing of fraud discovery on employee whistleblowing reporting intentions. Journal of Business Ethics (online).
MacGregor, J., & Stuebs, M. (2014). The silent Samaritan syndrome: Why the whistle remains unblown. Journal of Business Ethics, 120, 149–164.CrossRef
Mesmer-Magnus, J. R., & Viswesvaran, C. (2005). Whistleblowing in organizations: An examination of correlates of whistleblowing intentions, actions, and retaliation. Journal of Business Ethics, 62, 277–297.CrossRef
Miceli, M. P., & Near, J. P. (1984). The relationships among beliefs, organizational position and whistle-blowing status: A discriminant analysis. Academy of Management Journal, 27, 687–705.CrossRef
Miceli, M. P., & Near, J. P. (1985). Characteristics of organizational climate and perceived wrongdoing associated with whistle-blowing decisions. Personnel Psychology, 38, 525–544.CrossRef
Miceli, M. P., & Near, J. P. (1988). Individual and situational correlates of whistle-blowing. Personnel Psychology, 41, 267–281.CrossRef
Miceli, M. P., & Near, J. P. (2002). What makes whistle-blowers effective? Three field studies. Human Relations, 55, 455–479.CrossRef
Mustafa, S. T., & Meier, H. H. (2006). Audit committees and misappropriation of assets: Publicly held companies in the United States. Canadian Accounting Perspectives, 5, 307–333.CrossRef
Mustafa, S. T., & Youssef, N. B. (2010). Audit committee financial expertise and misappropriation of assets. Managerial Auditing Journal, 25, 208–225.CrossRef
Nayir, D. Z., & Herzig, C. (2012). Value orientations as determinants of preference for external and anonymous whistleblowing. Journal of Business Ethics, 107, 197–213.CrossRef
Near, J. P., & Miceli, M. P. (1985). Organizational dissidence: The case of whistle-blowing. Journal of Business Ethics, 4, 1–16.CrossRef
Near, J. P., Rehg, M. T., Van Scotter, J. R., & Miceli, M. P. (2004). Does type of wrongdoing affect the whistle-blowing process? Business Ethics Quarterly, 14, 219–242.CrossRef
Nunnally, J. C. (1967). Psychometric theory (1st ed.). New York: McGraw-Hill.
Oppenheim, A. N. (1996). Questionnaire design and attitude measurement (2nd ed.). London: Continuum Books.
Patel, C. (2003). Some cross-cultural evidence on whistle-blowing as an internal control mechanism. Journal of International Accounting Research, 2(1), 69–96.CrossRef
Ponemon, L. A. (1994). Whistle-blowing as an internal control mechanism: Individual and organizational considerations. Auditing: A Journal of Practice and Theory, 13(2), 118–130.
Rae, K., & Subramaniam, N. (2008). Quality of internal control procedures: Antecedents and mediating effect on organisational justice and employee fraud. Managerial Auditing Journal, 23, 104–124.CrossRef
Robinson, S. N., Robertson, J. C., & Curtis, M. B. (2012). The effects of contextual and wrongdoing attributes on organizational employees’ whistleblowing intentions following fraud. Journal of Business Ethics, 106, 213–227.CrossRef
Rothwell, G. R., & Baldwin, J. N. (2007). Ethical climate theory, whistle-blowing, and the code of silence in police agencies in the state of Georgia. Journal of Business Ethics, 70, 341–361.CrossRef
Sarbanes-Oxley Act. (2002). PL 107-204, 116 Stat 745.
Schmidt, M. (2005). “Whistle blowing” regulation and accounting standards enforcement in Germany and Europe—An economic perspective. International Review of Law and Economics, 25, 143–168.CrossRef
Schultz, J. J., Johnson, D. A., Morris, D., & Dyrnes, S. (1993). An investigation of the reporting of questionable acts in an international setting. Journal of Accounting Research, 31(Studies on International Accounting), 75–103.
Seifert, D. L., Sweeney, J. T., Joireman, J., & Thornton, J. M. (2010). The influence of organizational justice on accountant whistleblowing. Accounting, Organizations and Society, 35, 707–717.CrossRef
Sharma, V. D. (2004). Board of director characteristics, institutional ownership and fraud: Evidence from Australia. Auditing: A Journal of Practice & Theory, 23(2), 105–117.CrossRef
Sims, R. L., & Keenan, J. P. (1998). Predictors of external whistleblowing: Organizational and intrapersonal variables. Journal of Business Ethics, 17, 411–421.CrossRef
Sobel, M. E. (1982). Asymptotic confidence intervals for indirect effects in structural equation models. In S. Leinhardt (Ed.), Sociological methodology (pp. 290–312). Washington, DC: American Sociological Association.
Somers, M. J. (2001). Ethical codes of conduct and organizational context: A study of the relationship between codes of conduct, employee behavior and organizational values. Journal of Business Ethics, 30, 185–195.CrossRef
Taylor, E. Z., & Curtis, M. B. (2010). An examination of the layers of workplace influences in ethical judgments: Whistleblowing likelihood and perseverance in public accounting. Journal of Business Ethics, 93, 21–37.CrossRef
Vandekerckhove, W., & Tsahuridu, E. E. (2010). Risky rescues and the duty to blow the whistle. Journal of Business Ethics, 97, 365–380.CrossRef
Victor, B., Treviño, L. K., & Shapiro, D. L. (1993). Peer reporting of unethical behaviour: The influence of justice evaluations and social context factors. Journal of Business Ethics, 12, 253–263.CrossRef
Zhang, J., Chiu, R., & Wei, L. (2009). On whistleblowing judgment and intention: The roles of positive mood and organizational ethical culture. Journal of Managerial Psychology, 24, 627–649.CrossRef
Zhang, J., Pany, K., & Reckers, P. (2013). Under which conditions are whistleblowing “Best-Practices” best? A Journal of Practice & Theory, 32(3), 171–181.CrossRef
Zhang, Y., Zhou, J., & Zhou, N. (2007). Audit committee quality, auditor independence and internal control weaknesses. Journal of Accounting and Public Policy, 26, 300–327.CrossRef
Metadata
Title
Detecting Fraud: The Role of the Anonymous Reporting Channel
Authors
Elka Johansson
Peter Carey
Publication date
08-05-2015
Publisher
Springer Netherlands
Published in
Journal of Business Ethics / Issue 2/2016
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-015-2673-6

Other articles of this Issue 2/2016

Journal of Business Ethics 2/2016 Go to the issue

OriginalPaper

Transformation of Islamic Work Ethic and Social Networks: The Role of Religious Social Embeddedness in Organizational Networks

OriginalPaper

Self-Service Technologies and e-Services Risks in Social Commerce Era

OriginalPaper

The Impact of Occupational Community on the Quality of Internal Control

OriginalPaper

In Which Context is the Option Clause Desirable?

OriginalPaper

Collectivism and Corruption in Commercial Loan Production: How to Break the Curse?

OriginalPaper

From Food Desert to Food Oasis: The Potential Influence of Food Retailers on Childhood Obesity Rates