Paper Versus Practice: A Field Investigation of Integrity Hotlines

• Author: EUGENE SOLTES
• Published date: 01 May 2020
• Date: 01 May 2020
• DOI: http://doi.org/10.1111/1475-679X.12302

DOI: 10.1111/1475-679X.12302

Journal of Accounting Research

Vol. 58 No. 2 May 2020

Printed in U.S.A.

Paper Versus Practice: A Field

Investigation of Integrity Hotlines

EUGENE SOLTES

∗

Received 1 December 2017; accepted 24 February 2020

ABSTRACT

In an effort to motivate firms to more rapidly detect potential misconduct,

legislators, regulators, and enforcement agencies incentivize firms to have

integrity or “whistleblowing” hotlines. These hotlines provide individuals an

opportunity to report alleged misconduct and seek guidance about how to

appropriately respond. Beyond some isolated examples, little is known about

the responsiveness of hotlines to actual claims of alleged misconduct. I under-

take a field study to investigate how hotlines function in practice by making

four different inquiries involving alleged misconduct to nearly 250 firms. I

find that one-fifth of firms have impediments (e.g., phone line disconnected,

email bounce back, direct to incorrect website) that hinder reporting and

approximately 10% of firms do not respond in a timely manner. Overall, this

investigation illuminates several differences between integrity hotlines “on pa-

per” and how they actually perform in practice.

∗Harvard Business School.

Accepted by Philip Berger. I would like to thank Hui Chen, Paul Healy, Justin Hopkins,

Grace Liu, Julian Sarafian, Suraj Srinivasan, Ben Vollaard, and Kim Westermann, and work-

shop participants at the NYU Law and Finance Seminar, AAA Audit Midyear Meeting, NYU

Summer Accounting Camp, Harvard Law School Roundtable on Corporate Governance, De-

loitte, EY, PCAOB, Department of Justice (Fraud Section), the Securities and Exchange Com-

mission, and 2019 JAR Conference participants for helpful feedback. This research is funded

by the Harvard Business School. An earlier version of this paper was circulated under the title

“The Difficulty of Being Good: The Efficacy of Integrity Hotlines.”

429

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

430 E.SOLTES

JEL codes: K2; K4; M1

Keywords: hotlines; compliance programs; corporate misconduct

1. Introduction

Misconduct imposes considerable costs on both firms and society (Dechow,

Sloan, and Sweeney [1996], Karpoff, Lee, and Martin [2008], Kedia and

Philippon [2009], Dyck, Morse, and Zingales [2017]). In an effort to more

effectively prevent and detect misconduct, firms create compliance pro-

grams that include training programs, codes of conduct, analytic detec-

tion software, and integrity (i.e., “whistleblowing”) hotlines.1Among these

different compliance initiatives, hotlines have garnered especially signifi-

cant attention from legislators, regulators, courts, and prosecutors: The

Sarbanes-Oxley Act (SOX) requires firms to provide a means for employees

to anonymously report alleged accounting misconduct, prosecutors at the

Department of Justice (DOJ) consider the existence of a reporting hotline

as one factor when deciding whether and how to charge a firm, and the

United States Sentencing Commission (USSC) guides courts to consider

more lenient sentencing for firms that have an effective hotline as part of

their compliance program.

Integrity hotlines offer individuals an opportunity to report claims of

alleged misconduct and to seek guidance about how to appropriately

respond to potential misconduct. Prior evidence shows that hotlines can

help more rapidly identify and address misconduct. Dyck, Morse, and

Zingales [2010], for instance, show that misconduct is more frequently

detected and reported by employees than by auditors, analysts, or the

media. Similarly, the Association of Certified Fraud Examiners finds that

nearly 40% of all cases of misconduct are detected through tips provided to

organizations (ACFE [2016]). By leading to swifter detection of violations,

internal tips also reduce the duration of misconduct. The median duration

of frauds detected through tips is 17 months, whereas frauds detected

by external auditors or law enforcement last 24 and 36 months, respec-

tively (ACFE [2016]).2By relying on insider knowledge of firm activity,

1Firms utilize different names to describe their hotlines, with “ethics,” “integrity,” “whistle-

blowing,” and “reporting” used interchangeably. Weaver, Trevi˜

no, and Cochran [1999] exam-

ine the names of compliance-related telephone lines and find a variety of different names

including “compliance hotline” and “helpline” rather than “hotline.” For simplicity, I utilize

“integrity hotline” in subsequent discussion, although specific firms may utilize a different

descriptor for their reporting mechanism.

2The ACFE also finds that detecting fraud earlier tends to mitigate losses. As examples,

fraud losses detected within 6 months average $50,000 (via monitoring); within 12 months,

$108,000 (via internal audit); within 18 months, $130,000 (via tips); and within 24 months,

$935,000 (via police, ACFE [2018]).

PAPER VERSUS PRACTICE 431

hotline inquiries can provide valuable information to mitigate the adverse

consequences associated with misconduct (Bowen, Call, and Rajgopal

[2010]).

Although there are examples of misconduct being more rapidly detected

and addressed because of hotline tips, there is also considerable skepti-

cism that hotlines are, on average, responsive to allegations of miscon-

duct. For example, even after receiving numerous hotline inquiries de-

scribing the fraudulent creation of customer accounts, officers at Wells

Fargo took no steps to follow up or mitigate the misconduct (Wells Fargo

[2017]). One prominent attorney more bluntly described the skepticism

about integrity hotlines by noting that “many employers create hotlines

merely to help insulate themselves from legal liability without ever follow-

ing up on complaints” (Scheiber [2017]). Numerous regulatory bodies in-

cluding the Securities and Exchange Commission (SEC), Internal Revenue

Service (IRS), and Equal Employment Opportunity Commission (EEOC)

have created their own hotlines to encourage reporting, out of concern

that firms’ own reporting systems may fail to detect misconduct or respond

to inquiries. As evidence, 83% of those reporting allegations to the SEC’s

whistleblower hotline had previously raised their concern internally (SEC

[2018]).3

Beyond a few public anecdotes, little is known about how integrity hot-

lines actually function. In this paper, I conduct a field study to understand

the availability and responsiveness of integrity hotlines by reporting four

cases of alleged misconduct to nearly 250 firms. Two of these inquiries re-

late to financial reporting matters (financial statement manipulation and

bribery), and two inquiries relate to workplace matters (harassment and

discrimination). In each instance, my inquiry described a concern about

potential misconduct and sought firm guidance on how to respond.

I investigate hotlines by examining two dimensions of their performance:

accessibility and responsiveness. Although firms can describe the availabil-

ity of an anonymous hotline “on paper,” simply listing its availability does

not mean that the hotline is necessarily functioning. Specifically, if an indi-

vidual cannot readily report on the hotline, the hotline cannot be viewed as

an effective anonymous reporting channel. Across sample firms, I find 12

different obstacles impeding the reporting of misconduct, including web

redirects to incorrect pages, email bounce backs, and disconnected phone

lines. Notably, many of these impediments cannot be seen as mere incon-

veniences or minor delays in the reporting process. In some instances, the

reporting channel itself is nonfunctional and would prevent reporting. I

find that 20% of firms within my sample have at least one obstacle on their

phone, web, or email hotline. Thus, although firms may project “on paper”

3Internationally, anonymous hotlines to report concerns or misconduct are also increas-

ingly required. For example, the UK Corporate Governance Code requires a means for em-

ployees to raise concerns anonymously (Financial Reporting Council [2018] and Financial

Conduct Authority [2018]).