What Motivates a Person to Blow the Whistle on Financial Wrongdoing?
Whistleblowing has become a more accepted practice in our society in part because the Dodd-Frank Financial Reform Act sanctions the practice under specific circumstances. The questions I address in today’s blog are: What are the values exhibited by a whistleblower? Is the would-be whistleblower an ethical person or just someone looking for a big payday? How might we make such a determination?
The award has been described as incentivizing whistleblowing because it may encourage a disgruntled employee to gather information about financial wrongdoing and then inform the SEC of the matter solely because of the monetary award. The SEC’s whistleblower program under Dodd-Frank rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. Whistleblower awards can range from 10 percent to 30 percent of the money collected from an enforcement action.
Individuals with internal compliance or audit responsibilities at an entity, including CPAs, who receive information about potential violations, cannot receive whistleblower awards since it is part of their job responsibilities to report suspicion of illegal acts to management. However, these individuals are not excluded from receiving a whistleblower award where:
- Disclosure to the SEC is needed to prevent “substantial injury” to the financial interest of an entity or its investors,
- The whistleblower reasonably believes the entity is impeding investigation of the misconduct or
- The whistleblower has first reported the violation internally and at least 120 days have passed.
On September 23, the SEC announced an expected award of more than $30 million to a whistleblower living in a foreign country who provided key information that led to a successful SEC enforcement action. Previously, the biggest award ($14 million) went to a whistleblower a year ago for information that led to an enforcement action that recovered substantial investor funds.
The $30 million award will be the largest made by the SEC’s whistleblower program. According to Andrew Ceresney, Director of the SEC’s Division of Enforcement, “This whistleblower came to us with information about an ongoing fraud that would have been very difficult to detect. Whistleblowers…should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws.
The ethics of whistleblowing is a tricky matter. Waytz points out that whistle-blowing brings two moral values, fairness and loyalty, into conflict. Doing what is fair or just (e.g., promoting an employee based on talent alone) often conflicts with showing loyalty (e.g., promoting a longstanding but unskilled employee).
I would add to the analysis responsibility and accountability because these values underlie the act of blowing the whistle. Responsible people blow the whistle when they believe more harm than good will occur if the whistleblower stays silent. A virtuous whistleblower acts in an ethical manner if she truly believes a responsibility exists to protect the public interest. Such a person is willing to accept the consequences of her actions. i.e., she is accountable for her actions.
Loyalty is a powerful ethical value and may inhibit a would-be-whistleblower from coming forward. However, there are numerous examples of where loyalty trumped higher ethical values, such as honesty and integrity, with the result being that financial fraud was not disclosed (e.g. Enron and WorldCom) with devastating results for shareholders.
The most important consideration in assessing whether a whistleblower acts in an ethical manner is the intention for one’s action. Is it to right a wrong? Is it to give voice to one’s values in the face of countervailing forces? Or, is the basis for the action the pursuit of self-interests, which may manifest itself in blowing the whistle in order to cash in on the whistle-blower award? After all, greed is a powerful motivating force when considering whether to blow the whistle on financial wrongdoing.
An ethical person is one who posses strong character traits built on courage and informed by the belief that integrity is the backbone of ethical decision-making. A would-be-whistleblower is willing to stand her ground even in the face of pressure from higher-ups to stay silent. It’s not because of the possibility of receiving a whistleblower’s award. Instead, the whistleblower believes in principled behavior and leads her life in accordance with ethical values.
Blog posted by Steven Mintz, aka Ethics Sage, on September 30, 2014. Dr. Mintz is a professor in the Orfalea College of Business at Cal Poly San Luis Obispo. Professor Mintz also blogs at: www.workplaceethicsadvice.com.