Evidence on the Use and Efficacy of Internal Whistleblowing Systems

• Date: 01 May 2020
• Author: KYLE T. WELCH,STEPHEN R. STUBBEN
• DOI: http://doi.org/10.1111/1475-679X.12303
• Published date: 01 May 2020

DOI: 10.1111/1475-679X.12303

Journal of Accounting Research

Vol. 58 No. 2 May 2020

Printed in U.S.A.

Evidence on the Use and Efficacy

of Internal Whistleblowing Systems

STEPHEN R. STUBBEN

∗AND KYLE T. WELCH

†

Received 3 December 2018; accepted 17 February 2020

ABSTRACT

Using a proprietary data set from a provider of internal whistleblowing (WB)

systems, we analyze nearly two million internal WB reports submitted to over

1,000 publicly traded U.S. firms. We provide descriptive statistics, over time

and across report types, on the amount and summary details of information

provided, how extensively management reviews reports, the amount of time

until reviews were completed, and the outcome of these reviews. Further, we

examine the characteristics of firms with more actively used systems (i.e., a

higher volume of reports, more information provided in reports, and reports

that are more frequently reviewed by management). Finally, we show that

internal WB report volume is associated with fewer and lower amounts of

government fines and material lawsuits.

JEL codes: G34; G38; M41; M42; M54

Keywords: whistleblowing; employee hotlines; corporate governance;

Sarbanes-Oxley Act

∗University of Utah; †George Washington University.

Accepted by Christian Leuz. We thank Andy Call, Justin Hopkins, Delphine Samuels

(discussant), Nate Sharp, Jaron Wilde (discussant), two anonymous reviewers, and workshop

participants at the University of Wisconsin, the 2019 FARS Midyear Meeting, the 2019 Utah

Winter Accounting Conference, and the 2019 Journal of Accounting Research conference for

providing helpful comments and suggestions. We also thank NAVEXGlobal for providing data

on internal whistleblowing reports and the Corporate Research Project of Good Jobs First for

providing data on government fines. An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

473

CUniversity of Chicago on behalf of the Accounting Research Center, 2020

474 S.R.STUBBEN AND K.T.WELCH

1. Introduction

Internal whistleblowers, employees who report potential problems within

their firm to management, are widely viewed as an important resource in

identifying and bringing to light wrongdoing within firms. Although inter-

nal whistleblowing (WB) systems (also known as internal reporting systems)

have been required for public companies in the United States since the

2002 Sarbanes-Oxley Act (SOX), the use and efficacy of these systems is

not widely known due to a lack of available data. For example, have pub-

lic companies implemented internal WB systems only “on paper” to meet

SOX requirements, or are they frequently used by employees and other

stakeholders? What are the characteristics of reports filed? Do they pertain

only to accounting issues as required by SOX, or do firms collect reports

on a wider range of potential issues? Which types of companies have more

actively used systems (i.e., which companies receive more reports, receive

more detailed reports, and access reports more frequently)? And, are the

systems effective? Using proprietary data from the world’s largest provider

of internal WB systems, NAVEX Global, we examine nearly two million in-

ternal WB reports filed with over 1,000 publicly traded U.S. firms to provide

the first empirical examination in the academic literature on the character-

istics of internal reports and the firm characteristics and outcomes associ-

ated with the use of internal WB systems.1

By providing employees a secure, anonymous means to report issues,

an internal WB system enables management to identify problems difficult

to discover via traditional reporting and monitoring.2Although employ-

ees could approach their supervisors directly with concerns, some might

choose not to report without the option to remain anonymous (e.g., if the

supervisor is part of the concern, if the employee does not wish to be per-

sonally associated with any fallout from the report, or if the employee fears

retaliation). In addition, internal WB systems allow a direct line of commu-

nication, which may not otherwise exist, from employees to management.

As issues are identified, either through information provided in reports or

through conversations that are spurred by reports, management is able to

resolve them before they become more costly (e.g., before they become

more severe and/or become known outside the firm). However, it is also

possible that firms install a WB system as required by SOX simply to be

in compliance without actively promoting or using it. Management may

1NAVEX Global granted us limited and secure access to data managed under its

EthicsPointRIncident Management system, a hotline system it provides to clients. Due to

the sensitive and private nature of these reports, we had access to only limited data on each

report—we did not have access to any free-response text entered by the reporter or any per-

sonally identifying information about either the reporter or individuals involved in the report.

2To be precise, many firms set up their internal WB systems to allow stakeholders beyond

just employees to submit reports. Because the vast majority (92%) of reporters who identify

their association with the firm are employees, we refer to use of WB systems by employees

while acknowledging that some reports are made by nonemployees.

THE USE AND EFFICACY OF INTERNAL WHISTLEBLOWING SYSTEMS 475

fear that the internal WB system will harm corporate culture by allowing

anonymous reports that replace in-person discussions with managers. In-

ternal WB systems might also permit employees, possibly underperforming

employees about to be terminated and seeking legal protections as whistle-

blowers, to make frivolous complaints that distract from more important

tasks. In addition, management may view the internal WB system as a po-

tential liability, a digital paper trail that could be subpoenaed in litigation.

Thus, the extent to which these systems are used in practice likely varies

across firms.

Our study has three primary objectives. First, we provide descriptive ev-

idence on reports made to publicly traded U.S. firms, including the types

of activities reported, characteristics of reporting individuals (i.e., the re-

porter’s connection to the company and choice to remain anonymous), the

amount of information provided, details of reported activities (i.e., how the

individual became aware of the alleged activity, whether management was

allegedly aware and/or involved in the reported activity, and the amount

of time the reported activity had been occurring), how frequently manage-

ment accessed reports, the amount of time until reviews were completed,

and the outcome of these reviews. Although similar statistics can be found

in industry reports (e.g., NAVEX [2019]), our study is the first to present

statistics for a sample of U.S. public companies and the first to employ re-

gression analyses that document associations while controlling for related

variables. Second, we examine which types of firms receive more reports, re-

ceive more detailed reports, and review reports more frequently. Third, we

examine the association between internal report volume and subsequent

outcomes, that is, government fines and litigation. We do so to test whether

the association is positive, possibly because a higher report volume indicates

the company has more problems, or negative, possibly because internal re-

ports allow the company to identify and address concerns before they result

in fines or litigation.

The descriptive evidence indicates that most reports relate to human re-

source (HR) issues such as discrimination, sexual or other forms of harass-

ment, and violations of HR policies (54.9% of reports). Business integrity

concerns (i.e., illegal or unethical business practices such as conflicts of

interest, falsification of company records, bribery, etc.) comprise 15.7% of

all reports, followed by reports regarding the misuse of corporate assets

(11.8% of reports), workplace safety concerns (8.1% of reports), and ac-

counting and financial concerns (0.7% of reports). The remaining 8.7%

of reports are not classified by NAVEX. Although internal WB systems for

accounting-related concerns were required by the SOX, accounting reports

comprise only a small portion of the total report volume. Further, the rel-

ative frequency of accounting reports declined following the Dodd-Frank

Act in 2010, which provided monetary incentives for external whistleblow-

ers. The relative frequency of HR incidents peaked in 2017, around the

time of the widespread recognition of the #MeToo movement. We confirm