The use of whistle-blowing to detect fraud

Abstract

This thesis presents four studies with the overarching aim of building understanding of the use of whistle-blowing to detect fraud. The first study provides a background on corporate whistle-blowing systems implemented by Australian companies through an analysis of corporate reporting policies. This study also investigates the factors that affect the implementation of corporate whistle-blowing systems, as indicated by the extent of disclosures provided in a company's whistle-blowing policy and the provision of a hotline service. The results indicate that strong internal governance and an ethical environment are important in driving the policy-making behind a corporate whistle-blowing system. The results also indicate that firms consider their legal environment and the economic costs and benefits when establishing a hotline service. The second study examines the factors associated with the likelihood that financial misconduct results in external whistle-blowing, in comparison to internal reporting. Using a sample of alleged financial misconduct reported in the press, the likelihood that financial misconduct results in external whistle-blowing is predicted to be associated with the incentives and opportunities of using an external reporting channel. In comparison to internal reporting, the results indicate that financial misconduct is more likely to result in external whistle-blowing when an external immunity policy is provided, when the perpetrator of misconduct has greater power, and when collusion is involved. The likelihood of external whistle-blowing is lower when an internal reporting policy is provided, when the whistle-blower is an employee, and when there is greater variable compensation. The third study examines the influence of organisational complexity and the quality of the audit committee on external whistle-blowing, in comparison to internal reporting. This study predicts that greater organisational complexity, as measured by firm diversification, increases the likelihood that financial misconduct results in external whistle-blowing. This study also predicts that a higher quality audit committee - as measured by audit committee independence, meeting frequency and expertise - reduces the likelihood that financial misconduct results in external whistle-blowing. Using a sample of alleged financial misconduct reported in the press, the results indicate a higher likelihood that financial misconduct results in external whistle-blowing when firms are more complex. The results also indicate that greater audit committee independence reduces the likelihood of external whistle-blowing. The fourth study examines the circumstances under which management retaliates against whistle-blowers. Whistle-blowing retaliation is the undertaking of undesirable action against a whistle-blower. Retaliation is predicted to be more likely when management is motivated to retaliate, when there is a suitable target and in the absence of a capable guardian. Using a sample of alleged financial misconduct reported in the press, the results indicate a greater likelihood of retaliation when management is allegedly involved in perpetrating misconduct, when the variable proportion of management's compensation is greater, when the firm is in a more precarious financial position, and when the whistle-blower is allegedly involved in the financial misconduct. Whistle-blowers are less likely to be retaliated against when there is greater audit committee independence and when ethical performance is a component of management's compensation.