Should Whistleblowers Get Big Rewards? Zicklin Professor Says Yes
September 14, 2020Whistleblowers who expose certain types of wrongdoing can receive substantial rewards if their tips lead to successful enforcement action. The Securities & Exchange Commission (SEC), for example, can pay tipsters up to 30 percent of the fines collected. The rationale for generous payouts is that whistleblowers face considerable risk in coming forward – if their employer retaliates, they may lose not just their job, but their entire career.
Supporters of big payments say they’re necessary to convince potential tipsters that the rewards outweigh the risks. But they’re controversial— the SEC has been considering caps on the largest some of the largest rewards.
Meanwhile, do big payouts actually deter accounting fraud? Heemin Lee, assistant professor in the Stan Ross Department of Accountancy, says they do—and has the research to prove it. After Lee’s 2019 paper, “Do Corporate Whistleblower Laws Deter Accounting Fraud?” was discussed last month in the National Law Review, she sat down for an interview with Zicklin News.
“It was challenging to show the deterrence effect of whistleblower laws empirically,” Lee says. “We found a setting that allowed us to study the causal impact of the law on firm managers’ reporting behavior and quantify the deterrence effect.”
Why, in her opinion, do big whistleblower payouts discourage cheating?
“Knowing that it becomes easier for whistleblowers to come forward encourages firm managers to be more careful in preparing their financial statements or less inclined to engage in fraud,” Lee explains.
“Although our paper doesn’t directly show how whistleblowers react to the amounts of rewards, we did show that the likelihood of accounting fraud decreases when the potential reward amount increases. Therefore I agree with the National Law Review writer’s view that putting a cap on whistleblower rewards will deter people from coming forward.”
Did anything in her research surprise her?
“We found it interesting, and surprising, that firms that were previously exposed to a state-level whistleblower law were less likely to be affected when the federal whistleblower law was introduced. More research needs to be done to better understand how different whistleblower laws interact with each other.”