End of Civility Project
Giving Voice to Values

Is Whistleblowing an Ethical Practice?

Whistleblowing and the Dodd-Frank Wall Street Reform and Consumer Protection Act

The Federal False Claims Act allows individuals who know of fraud committed against the US Government to file suit on behalf of the US against those who have falsely or fraudulently claimed federal funds. Filers typically recover 15 to 20 percent of the proceeds of a successful suit if the US intervenes on their behalf. This "bounty" provision has recently been extended as a result of Congresses passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Dodd-Frank applies similar types of financial rewards to a much larger range of wrongdoing, including many types of securities or accounting fraud or bribery allegations, not covered under prior whistleblowing laws. Criticism of the scope of the Act has comes from companies that believe that financial incentives for employees who tell regulators about securities fraud and other wrongdoing threatens to increase costs for companies and undermine internal fraud detection efforts required under the Sarbanes-Oxley Act. In case you have forgotten, the Sarbanes-Oxley Act was passed in the aftermath of frauds at companies such as Enron and WorldCom and includes a provision whereby employees who are discharged or retaliated against for blowing the whistle on wrongdoing may file a complaint with OSHA. OSHA then investigates and if it finds the evidence supports the employee’s claim and a settlement cannot be reached with the offending company, then OSHA will issue an order requiring the employer to reinstate the employee, pay back wages, restore lost benefits, and other possible relief to make the employee whole.

Even before Sarbanes-Oxley, companies attempted to deal with certain fraud allegations and claims of unethical and illegal behavior internally through hotlines and other kinds of anonymous reporting. The most troubling provision of Dodd-Frank is that it offers a financial incentive to ignore a company’s own process and go directly to the government. Corporate whistleblowers who use original evidence of financial fraud to approach the SEC or Commodity Futures Trading Commission can receive between 10% and 30% of a penalty that is over $1 million. One result is the vultures are already circling above as plaintiff lawyers reach out to potential whistleblowers to handle their complaints by issuing public releases and publishing articles about Dodd-Frank, and even soliciting the work.

The question I ask is this: Is whistleblowing an ethical practice? On the one hand it may serve as a deterrent to financial fraud and securities law violations by companies given the broader scope of Dodd-Frank. On the other hand it could lead some employees to spy on company actions, aggressively trace questionable transactions, and gather evidence of wrongdoing even if it has nothing to do with that employee’s job responsibilities. Do the ends of stopping corporate fraud and other wrongdoing justify the means of potentially spying on one’s employer? What do you think?