The Impact of Whistleblowing on Internal Controls in Organisations

A whistle is usually blown to get attention that will lead to subsequent action relating to the reason for which the whistle is blown. The person who blows the whistle could be referred to as a whistle-blower. The act of blowing the whistle to get attention, so as to highlight a situation, which will lead to an action, could be referred to as whistleblowing. The terms whistle-blower and whistleblowing are two relatively new phenomena that have recently entered the corridors of many organisations. According to Gray (n.d.) “whistleblowing as a metaphor refers to the act of disclosing information concerning conduct with or by an organisation that the whistle blower believes to be unethical, illegal, or dangerous with the intent of having the conduct reviewed and stopped. He further purports that “whistleblowing occurs in two contexts; internal whistle blowing involves disclosure to higher authorities within an organisation and eternal whistleblowing involves disclosure to outside enforcement authorities and or the press”.

Cranville (n.d.) posited that “although this statement (definition) has been widely accepted, researchers have indicated problems with this definition. Farrell and Petersen (1982), for instance, perceived whistleblowing as occurring only when information is leaked to parties outside the organization. That is, whistleblowing can only occur when parties external to the organization are informed of illegal or unlawful wrongdoing within an organization. These individuals may be members of the media, government officials, members of public support groups, or various other parties external to the organization who can bring about change”. The author further stated that “Near and Miceli’s (1985) definition of whistleblowing, however, describes it as taking place when a person reports individual or corporate wrongdoing to sources either internal or external”. The review of literature focuses primarily on internal whistleblowing. This direction is pursued in response to the growing need in organisations to improve internal efficiencies, effectiveness and transparency, incorporating the recognition and adherence of standards. Whilst the aim is to improve the efficiencies in an enterprise, questions arise as to the level of effectiveness of whistleblowing and the methodology used to arrive at this. Effective whistleblowing is defined as “the extent to which the questionable or wrongful practice (or omission) is terminated at least partly because of whistle blowing and within a reasonable timeframe” (Near & Miceli, 1995, p. 681).

Researchers (for example Nieweler (2005) have argued that a correlation appears to exist between internal whistleblowing and the effectiveness of the entity. The strength of the correlation will allow for the easy discernment of the effectiveness. That is the stronger the correlation, the more observable its effectiveness appears. Nieweler (2005) posited that “there is a relationship between blowing the whistle and an organization’s culture. A strong and effective internal ethics program is an important component of a healthy corporate culture; effective whistleblowing depends on the right corporate culture that encourages concerns to be raised”. The writer further alluded that “whistleblowing acts as a deterrent to corrupt practices, encourages openness, promotes transparency, establishes the risk management systems, and helps protect the reputation of an organization”. “Whistleblowing should be seen as a safety valve, an essential one at that, and should be part of an organization’s internal controls. Having a whistleblowing process in place does not mean failure. Boards need to consider the effectiveness of whistleblowing policies and procedures as part of their oversight of internal controls, and internal audit plays an important role in supporting boards in this area”. “Employees who sound the alarm about misconduct early enough can help to ensure that problems come to light before it is too late, helping to prevent disasters from taking over. An organization’s whistleblowing procedures should encourage individuals to disclose concerns using appropriate channels before those concerns become serious problems, damaging an organization’s reputation through negative publicity, regulatory investigation, violations and fines”.

Throughout this research various sub-themes will be examined so as to provide a more detailed and in depth application of whistleblowing as a tool of internal control. These sub-themes include Risk Assessment, Ethics, Socialization and Culture. Enterprise risk Management is defined as a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives. (COSO, 2004). The Committee of Sponsoring Organizations of the Treadway Commission (COSO) states that in assessing risk, management considers expected and unexpected events. Management assesses the risk of unexpected potential events and expected events that can have a significant impact on the entity. Although the term “risk assessment” sometimes has been used in connection with a one-time activity, in the context of enterprise risk management the risk assessment component is a continuous and iterative interplay of actions that take place throughout the entity. (COSO, 2004). In a research article Lewis & Vandeckerckhove 2011, the editor in comparing whistle blowing and risk manager, states that even though they are some similarities between the two, they appear to be independent and have different process and objectives. The primary focus of whistleblowing is protecting the whistle blower and the compliance with legal and regulatory frameworks with little focus on the potential organisational benefits of whistleblowing in identifying and managing risk. (Whistleblowing and Democratic Values, 2011, p. 56)

Despite the correlation between whistleblowing and risk management, there are very few examples where this relationship is identified and discussed in the literature. Moeller (2011) is one of those who discuss whistleblowing in relation to ERM. He states that whistleblowing programs can be a useful tool for ERM but also that ‘whistleblowing cases can inflict serious damage to an enterprise’s reputation as well as on the careers of accused managers’ (p. 204). Moeller emphasises the risk that the ineffective management of whistleblowing programs may create while mentioning that ‘whistleblowing provisions are primarily designed to protect employees rather than provisions to increase enterprise internal controls or to cover identified risks’ (p. 205).( Lewis David & Wim Vandeckerckhove) Lewis (2011) in his article states that The Association of Certified Fraud Examiners (ACFE), for example, indicates that ‘tips’ have been found to be the most common form of fraud detection in all their research undertaken since 2002. The ACFE research examines occupational fraud, which involves any case where an occupational position is used for personal gain, in all levels of the organisation. In 2010, tips accounted for 40.2% of the initial detection of fraud. Management review was the second form uncovering 15% while internal audit was third uncovering 14% of frauds. The ACFE 2010 report, which is based on 1,843 cases of fraud reported by the Certified Fraud Examiners in more than 100 countries, found that 49.2% of fraud tips were provide by employees and 13.4% were provided anonymously. Organisations that had fraud hotlines where employees can report suspected wrongdoing without fear of retaliation had a higher fraud detection rate (47%) than those that did not (34%). ).( Lewis David & Wim Vandeckerckhove).

Over the years, it has been noted that whistle blowing used as a tool of internal control, leads to a reduction of under-reporting of internal wrongdoings. Studies have shown that there is a direct correlation between ethics and whistleblowing and a person’s socio-cultural background and whistleblowing. As it relates to ethics, an individual will be more inclined to follow after morally accepted principles and report wrong doings, if she or he’s moral identity is high. According to Aquino & Reed, 2002, moral identity is the extent to which individuals consider themselves to be a moral person. Therefore, if a person’s moral identity is high, then that person will be quick to report instances of wrong doings. If the moral identity is low, then that person will not be so willing to report wrong doings. Chung et al. 2004, Paul and Townsend 1996, stated that a good internal whistle-blowing system will lead to the timely detection of fraud, permitting the company to correct the wrongdoing and minimise the costs of the fraud. It is further argued by Coram et al. 2008 that fraud has increased in recent years in terms of the frequency and costs, with employees and management being the greatest perpetrators. One way to mitigate against this is the implementation of an internal whistle-blowing system that complements the companies’ code of ethics as recommended by the Standards Australia 2003.

According to Bowden and Smythe 2009; Miceli et al. 2009; Paul and Townsend 1996, when employees are encouraged to act within the code of ethics, the safety and well-being of the organisation is increased, damage claims and legal regulation avoided, the satisfaction of employees increased which will foster greater work commitments and loyalty. Mayer, Aquino, Greenbaum, and Kuenzi (2012) found that ethical leadership reduces employees’ unethical behavior and conflict in a work group. Den Hartog and Belschak (2012) also showed that ethical leadership influences employee initiative as well as counterproductive work behavior. Therefore, adherence to the code of ethics must be from the top and then move downwards in organizations. According to Schultz et al. 1993, Brody et al. 1999, Patel 2003, understanding culturally embedded norms that will affect whether or not an individual participates and does not participate in whistleblowing can assist organizations in the design and maintenance of effective internal control environments globally. There are several behavioural theories that supports this issue. One such theory is the theory of reasoned action which states that a person’s behavioural intentions will predict a voluntary behaviour and that intentions are determined by subjective norms and one’s attitude towards the behaviour. Cialdini and Trost 1998 define subjective norms as an individual’s interpretation of the opinions of important others regarding the behaviour in question. In other words, an individual’s opinion who is held in high regard by another, will result in a particular behaviour or reaction, than someone of less importance. According to Cialdini and Trost, norms have the capacity to influence human actions because they make clear the behaviours that are expected of individuals by those in their social world.

Chiu and Hong 2007 stated that culture functionally enables group members to interpret and make sense of their world and experiences. It provides identity and values which drives an individual’s decision making process and social behaviour. As such, a corporation’s processes and policies that incorporates the influence of subjective norms and attitudes will be more effective in the utilisation of whistleblowing as a means of internal control. Whistleblowing thrives in an environment of inclusiveness and collectivism. Culture is defined as the ideas, customs, and social behaviour of a particular people or society, while socialisation is defined as the process of learning to behave in a way that is acceptable to society. We look at the impact culture and socialisation has on “blowing the whistle” in the organisation. According to (Richard G. Brody; John M. Coulter; Suming Lin) “Society continues to be concerned about the impact of ethics on decision making”, but we would need to go one step further and look closer at how culture, norms and how our socialisation from birth and throughout our adolescence and adult years helps to shape and impact our ethical and moral decisions to embrace a whistleblowing phenomenon.

With the highest of ethical standards that one may possess, what is customary and normal, how things are done in and around us, in our country, community, school or workplace, has the potential to outweigh any ethical or moral high road we wish to walk. Geert Hofstede a known Dutch researcher of culture defines culture as “the collective programming of the mind which distinguishes the members of one group or category of people from another. His cultural dimensions theory describes the effects of a society’s culture on the values of its members and how these values relate to behaviours”. His study focused on the multiple ways countries vary in terms of culture (Brody; Coulter; Lin) e.g., USA and Taiwanese accounting students and their approach to whistle blowing. In an extensive research program Hofstede (1980, 1991) particularly the “Individualism” category between the US and Taiwanese accounting students, the study found that Taiwan students had a low individual rating, indicating that the focus was more on them and their individual achievement and protecting their own interest, while the US scored highest on this measure. This result indicates that Taiwan has a collective culture, wherein participation in and protection of one’s in-group is a central value. This may affect audit practice as the conclusion is that collectivist auditors may be less apt to ask clients for “private” information or to report to an outside audit committee on weaknesses in a client’s internal control system” (e.g., Cohen et al., 1993), (Brody; Coulter; Lin).

The decision to “blow the whistle” (Miethe and Rothschild, 1994) on an organization or an employee whether internally or externally has costs benefits associated with such a decision. The fear of been branded the “Snitch” “Informer”, side-lined, victimized or fired from the workplace are major factors an individual will consider before he considers carrying out such an act. His socialization, who his friends are, their opinion, what is normally uttered in the streets, how his peers will view him are all factors of is culture and socialization. The past examples of similar acts carried out by associates and any subsequent unpleasant repercussions towards that individual undoubtedly will play a major role in the decision to blow the whistle as well. Due to these life altering, personal and professional implications, such as dismissal or otherwise retaliated upon (e.g., Finn, 1995; Glazer and Glazer, 1989), coworkers who fear retaliation from management may also avoid whistle-blowers (Miceli and Near, 1992) or feel that the whistle-blower has betrayed a trust with the organisation (Dandekar, 1991). This again could be seen as a direct link between cultural norms and socialisation – not desiring to be labelled or associated with the “traitor” or as in the study on the Taiwanese accounting students “saving face”.