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Monday
Nov302015

Are whistleblower reward programs really a good idea? 

The SEC’s office of the whistleblower awards money to individuals who provide tips that lead to successful enforcement actions where recoveries are more than $1 million.

Money for whistleblower awards comes from the SEC’s Investor Protection Fund, which is funded through disgorgement and penalties.

Among other things, the SEC program mentions the significance of original information and the extent of assistance in determining the amount of an award. Factors mentioned that might decrease an award are the culpability of the whistleblower in the issue, any delay in reporting, or interference with internal reporting.

Since the start of the SEC whistleblower program in 2011, the agency has awarded $54 million to 22 whistleblowers "who provided the SEC with unique and useful information that contributed to a successful enforcement action."

The biggest award was more than $30 million in 2014. And a 2013 award topped $14 million. In July this year, the SEC awarded more than $3 million to a company insider whose information helped stop an ongoing complex fraud.

The SEC whistleblower award program looks like a success. But not everyone agrees on the effectiveness of programs that incentivize whistleblowing.

Here are some possible disadvantages of bounty programs:

Intrinsic and extrinsic motivation: Reporting on an ethical violation is an intrinsic motivation factor for a whistleblower. With all factors remaining constant (whistleblower protection), an incentive makes whistleblowing an extrinsic motivation. Psychological theories have demonstrated that extrinsic motivation can be detrimental to the objective of creating a more ethical workplace.

Public money: The money paid out from the SEC's Investor Protection Fund comes from disgorgements and penalties in the SEC's various enforcement actions. That means it is money that was essentially lost by investors and stakeholders because of offenses by other companies. Using those funds to pay whistleblowers from other companies is arguably inconsistent with the financial interests of the investors and stakeholders.

Cultural impact: Rewards to individual whistleblowers do not stimulate cultural or behavioral change across organizations. Instead, individual rewards influence whether other individuals will become whistleblowers in the future. The sought-after cultural impact on the organization doesn't happen.

Self-reporting: The SEC reward program uses the culpability of the whistleblower as a factor that may result in a decrease in the reward. This possibly impacts the whistleblower's decision to report the potential offenses.

*     *     *

The question, then, is whether whistleblower award programs really help achieve lasting, positive change. Or if they instead create certain barriers to self reporting, and distort the role of the individual in helping create and maintain ethical organizations. 

We can certainly rate the SEC whistleblower award program as a success on at least a couple of levels. Twenty-two whistleblowers have received $54 million for reporting fraudulent activity, and the SEC says it used the whistleblower tips to stop several large-scale frauds that were ongoing.

But we also should ask if the SEC award program and others like it disregard the long-term development of organizational ethics and ultimately undermine individual responsibility. Then we need to decide if the programs are really such a good idea.

_________

Sundar Narayanan is a forensic accountant from India. He currently leads the forensic services of SKP Business Consulting LLP. He can be reached at snarayanan@skpgroup.com.

Reader Comments (3)

The Australian Senate Inquiry into FCPA Reforms has all the major police and regulatory bodies backing a WB Reward program. Some of the intel on US corporates is superior to the pleaded information by so-called class action specialists. The anti-WB advocates are not happy. Perhaps they've been naughty.
November 30, 2015 | Unregistered CommenterWitness Services Ripponlea
This is a very sober article. Indeed I think the intrinsic motivations is also greatly jeopardized by the enforcement of law. I mean, we want ethics and compliance to be upheld because it is the right thing to do, not because of a threat of prosecution. Right?
December 1, 2015 | Unregistered CommenterBojo
This is an exceptionally calm article. In fact I think the characteristic inspirations is additionally incredibly imperiled by the requirement of law. That is to say, we need morals and consistence to be maintained on the grounds that it is the proper thing to do, not in view of a risk of arraignment. Am i Correct ??
January 20, 2016 | Unregistered CommenterKatrina

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