Is Whistleblowing a Moral Act?

Whistleblowers can be seen as heroes, disloyal, or even selfish if, in the latter case, the motivation for blowing the whistle is to gain a financial award, as is available under the Commodities Future Trading Commission (CFTC), Federal False Claims Act, IRS, SEC and the Dodd-Frank Financial Reform Act.  Whistleblowers (known as “relators” in qui tam lawsuits, which allow individuals to prosecute a lawsuit and receive a reward) are awarded a whistleblower reward based on a percentage of the money recovered by the government when those recoveries are due to a qui tam lawsuit or claims made under the SEC, CFTC or IRS whistleblower programs.

According to the National Whistleblower Center, “a whistleblower is someone who reports waste, fraud, abuse, corruption, or dangers to public health and safety to someone who is in the position to rectify the wrongdoing.” In most cases, whistleblowers are employees who have information about their colleagues’ — or their company’s — inappropriate activities.

Whistleblowers have been credited for uncovering financial scandals including Enron, Olympus Corporation, WorldCom, Theranos, and others. Gary Gensler, the chair of the SEC, points out that “the tips, complaints, and referrals that whistleblowers provide are crucial to the SEC as we enforce the rules of the road for our capital markets.”

Characteristics of Whistleblowers

These results are echoed by the 2022 fraud report, Occupational Fraud: A Report to the Nations. Here are some results:

• 42% of all frauds were reported by a tip, more than twice the next mechanism.
• 53% of all frauds were reported by employees, more than three times the next reporter.
• 27% of reports were by telephone hotline.
• 40% of reports were by email.

Clearly, providing a hotline or other internal mechanism is important to not only report fraud within an organization but enable steps to be taken to reverse the effects of wrongdoing.

Whistleblowing can be considered a moral act if the disclosure of differences of opinion will likely change firm practices (Hoffman and Schwartz 2015) and prevent a wrong from happening (Velasquez 2011). Whistleblowing decisions do not take place in a vacuum. Indeed, whistleblowers need to understand the organization culture and the laws pertaining to whistleblowing. They need to consider whether the act of blowing the whistle should be done even in the face of resistance from one’s employer. They also need to consider whether to report differences internally or externally.

While it may seem like whistleblowing is inherently an ethical practice, the ethical dilemma that it creates pits loyalty to the organization against a moral duty to alert the authorities of wrongdoing:

“Many individuals find themselves in a moral quagmire when they discover illegal activities or other forms of non-compliance within their organization.” One reason is the company may not promote transparency, and may even discourage it, thus employees ‘will not feel confident that they can come forward when they spot wrongdoing. They might worry that they won’t be considered a ‘team player,’ or that their job might be at risk if they speak up."

Whistleblowing Systems

As noted by Ethico, to achieve an ethical company culture, there needs to be a compliance hotline and ethics training curriculum. One way to train employees is through case studies that present situations employees could face on the job. Educators can provide a valuable learning experience for students, who will enter the workplace after graduation and may encounter whistleblowing situations. By teaching about whistleblowing using case studies, real-world experiences can come to life and mimic on-the-job ethical dilemmas, with the goal of teaching students how to make ethical decisions.

The importance of whistleblowing can be seen by research conducted by Stubben and Welch, who analyzed whistleblowing reporting systems and outcomes of management reviews of reports using a proprietary data set from a provider of internal whistleblowing systems. The authors analyzed nearly two million internal reports submitted to over 1,000 publicly traded U.S. firms. The authors found that, on average, internal whistleblowing report volume is negatively associated with the number and dollar amount of government fines received and material lawsuits filed against the firm. Particularly, they found that a 10 percent increase in reports is associated with a two-percent decrease in the dollar amount of government fines received and a one-percent decrease in legal settlement amounts in subsequent years. The fact that this study found that whistleblowing can reduce fines and legal settlements argues for teaching about whistleblowing.

Gao and Brink review the accounting literature on whistleblowing and find that the final determinant of whether whistleblowing will occur include the characteristics of the organization, organizational perceptions of the appropriateness of whistleblowing, organizational climate, and organizational structure. Kapan et al. (2009) found that reporting intentions to an anonymous internal hotline were significantly higher than to the external hotline. Brink et. al (2013) and Brink et. al (2017) examine differences between the internal reporting channel established in response to the Sarbanes-Oxley Act (SOX) and the external reporting channel made available by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

The effect of monetary incentives and evidence strength on employees’ intentions to report fraud through these two channels has been studied. The authors of a research study found that reporting intentions are consistently higher for the internal channel. These findings are important because a U.S. Supreme Court ruling in Digital Realty, Inc. v. Somers, essentially requires the whistleblower to report to the SEC first to stop financial wrongdoing, even if the matter has yet to be reported internally.

When to Report

The dilemma for most people in business is whether to go to a regulatory agency and report the wrongdoing first, the Digital Realty ruling notwithstanding, or report internally and then consider going to an agency, such as the SEC, depending on what happens internally. If the matter has been resolved, then there is no reason to go to a regulatory agency so reporting internally first seems like the prudent approach.

Whistleblowers should consider the following in deciding what to do.

1. Gather all relevant facts.
2. Discuss the matter with one’s supervisor.
3. If the matter is not resolved, consider going up the chain of command (i.e., board of directors) to resolve the matter.
4. If nothing has been done to resolve the matter internally, consider reporting externally (i.e., SEC).
5. Decide whether to remain with the employer organization.

Ultimately the act of whistleblowing depends on the culture of the organization, ethical leadership of top management, ethics standards within the organization; whether a hotline exists; involvement of the audit committee or board of directors, and whether the organization is likely to retaliate for blowing the whistle.

Whistleblowers are an essential part of a healthy environment when the motivation to act is altruistic, not to strike back at perceived poor treatment, (i.e., reassignment within the organization) or for selfish reasons.

Blog posted by Steven Mintz, PhD on November 14, 2023. Find out more about Steve’s professional activities on his website (https://www.stevenmintzethics.com/). You can sign up for his newsletter and connect on LinkedIn (https://www.linkedin.com/company/ethics-sage/about/.)