What Have We Learned from Whistleblowing Cases?
10/30/2024
Things to Think About Before Deciding Whether to Blow the Whistle
Have you ever wondered when, how, and why whistleblowing first began? I did during the time that I researched whistleblowing cases for a paper that I wrote. I believe you will find the following interesting and instructive.
Background
The first reported case of whistleblowing dates back to February 1777, when officers on the USS Warren ship signed a petition to the Continental Congress documenting abuses by their commander, Esek Hopkins. Absent any legal protections for speaking out, the officers understood that they could be labeled as traitors for denouncing their commander in the middle of a war. The charges against Hopkins included a quick temper, misconduct and poor character. “I know him to be a man of no principles, and quite unfit for the important trust reposed in him,” wrote James Sellers, pointing to the inhumane treatment of prisoners. Hopkins was relieved of his command.
The first time that an award for blowing the whistle was given occurred during the Civil War (1861-1865). A law was passed to protect the Union army that gave federal officials the power to exact fines. Soldiers had complained about shoddy uniforms that would dissolve in the rain and some contractors mixed sawdust with gunpowder. The government was broke and didn’t have enough inspectors to uncover the fraud so Congress came up with a plan whereby they would give whistleblowers half of any fine it collected based on their accusations against their own companies. After the Civil War, the law was weakened and mostly ignored until the 1980s, when stories about questionable military spending—$400 for hammers and $600 for toilet seats—started to surface.
Bringing it to Modern Times
The 1960s
In modern times, most people associate the first use of the term whistleblowing by Ralph Nader, a U.S. civic activist, who is said to have coined the phrase in the early 1970s. In order to avoid the negative connotations found in other words such as informant or snitch, Nader championed laws to protect consumers, the environment, and government reform. His claim to fame was when he disclosed in his 1965 book, Unsafe at Any Speed, that the Chevrolet Corvair automobile had dangerous structural flaws.
The 1970s
Whistleblowing, in terms of the U.S. government, is generally associated with public awareness of fraudulent activities, with the release of the Pentagon Papers in 1971. Daniel Ellsberg, who leaked the Pentagon Papers that detailed U.S. actions during the Vietnam War, worked as a military analyst on a Pentagon project. The release detailed the government’s involvement in that War, much of which was not disclosed in the media including U.S. bombing of Cambodia and Laos. Ellsberg’s disclosures hastened the end of the Vietnam War.
The 1980s
In recent years, interest in whistleblowing has shifted to organizational ethics, in part due to a series of frauds in the 1980s in the financial services industry including bankruptcies at savings and loan institutions, insider trading, and trading in junk bonds. Individuals such as Ivan Boesky and Michael Milken were synonymous with what later became the mantra for egregious acts on Wall Street (“greed is good”) and the 1987 crime-drama film, Wall Street. Milken became known as the “junk bond king.”
It should be pointed out that subsequent to completing his prison term, Milken has become a philanthropist, devoting much of his life and savings to advance medical research, especially in cancer. Perhaps the moral of the story is a person who commits a crime can recover and regain their reputation for trust.
A variety of recent cases have been given widespread media coverage and hastened the day when individuals in organizations began to speak out publicly about harmful acts by those within their organization. I’ll limit the discussion to five well-known cases.
No one ever thought that a spacecraft headed to outer space would blow up but that’s just what happened on January 28, 1986. On January 27, the engineers and managers from the National Aeronautics and Space Administration (NASA) and shuttle craft contractor Morton Thiokol had met to discuss whether it was safe to launch Challenger because the so-called O-rings, or seals, may not stay intact because of low temperatures. The engineer’s recommendation not to launch was met with hostility, according to Roger Boisjoly, a Morton Thiokol engineer. After a brief discussion, the decision was made to launch with managers for the company overriding the concerns of the engineers. The Challenger craft launched in part because it carried, for the first time, a civilian, schoolteacher Christa McAuliffe, America’s first private citizen in space.
The 1990s
On March 24, 1993, Jeffrey Wigand was fired from his job at Brown & Williamson tobacco, having blown the whistle on the tobacco industry that was manipulating the amount of nicotine in cigarettes to increase the impact on the smoker and get them hooked. Wigand was the head of research for Brown & Williamson. He claimed that the company was trying to kill his research. Wigand had signed a confidentiality agreement in order to receive his severance benefits. He remained silent until February 4, 1996, when he decided it was more important to stop the tobacco industry than stay silent regardless of the confidentiality agreement. He chose to go public on the CBS news program, 60 Minutes, where he publicly broke the story with reporter Mike Wallace.
The 2000s—so far!
A well-known case that still has ramifications for government overreach is that of Edward Snowden who leaked confidential surveillance data collected by NASA that consisted of metadata collected on Americans and others. Snowden, a private contractor for the National Security Agency (NSA), believed it was wrong for NASA to monitor much of what Americans do on the Internet by collecting massive quantities of data on emails and phone contacts. Snowden reported the matter to journalists at the U.K. newspaper, The Guardian, and met with them on May 20, 2013, in Hong Kong. The story broke in The Guardian shortly thereafter and Snowden quickly became a persona non grata in the U.S. Snowden escaped to Russia and was granted asylum. He was granted permanent residency in October 2020 and full citizenship in September 2022.
Theranos is a more recent case that illustrates what can go wrong when the internal reporting of problems with equipment goes unheeded. Theranos tested blood simply by getting a sample through a pin prick in one’s finger and then analyzing the blood using a machine called “The Edison.” The company promoted the procedure as quicker and less painful than the traditional venipuncture. Elizabeth Holmes started Theranos in 2003. The company was a big hit with customers such as Safeway, Walgreens, and even the Cleveland Clinic. Holmes sold them and doctors and patients on the value of the process and cost-effectiveness. The problem was it did not work as intended. Theranos turned to more conventional equipment in some cases to analyze the blood.
There were two whistleblowers in the Theranos case: Erika Cheung and Tyler Schultz. Both reported their concerns to Holmes and the chief operating officer, Sunny Balwani. Neither of these two took the concerns very seriously. Cheung had pointed out the flawed quality controls internally and externally. Schultz told Holmes that the research results were tampered with, and multiple quality control tests were failing. He told her that the Edison only had an accuracy of 65 percent while the required accuracy results were 95 percent.
Holmes and Balwani ignored the warnings, but the fraud caught up with the company when in 2015, Schultz blew the whistle to a Wall Street Journal reporter. On June 15, 2018, Holmes and Balwani were indicted on multiple counts of wire fraud and conspiracy to commit wire fraud. The company started the process of dissolution in September 2018. Holmes will be released from prison on August 16, 2032. Balwani began his sentence on April 21, 2023: 12 years and 9 months. Some have labeled the Theranos fraud as “faking it until you make it.”
There are many cases of financial fraud that emanated from the early 2000s. For me, one stands out among the rest. The reason is for its accounting simplicity (although the falsehood was well hidden) and the exhaustive investigation to ferret out the fraud.
Cynthia Cooper, the vice president of internal auditing at WorldCom, acted on a tip about the improper accounting by ordering an exhaustive hunt for the so-called “line costs” that were improperly recorded as assets and expensed over time rather than expensed each year as they were incurred. Cooper and her investigators uncovered more than $3.8 billion of fraudulent balance sheet entries. WorldCom’s top managers, Bernie Ebbers the CEO and Scott Sullivan the CFO, dismissed her concerns. The audit committee and board of directors took no action. After an extended period of time during which Cooper even approached the external auditors, KPMG, to garner their support, the auditors withdrew their audit opinion for 2001, and the U.S. Securities and Exchange Commission began an investigation of the fraud on June 26, 2002.
Two things stand out about the WorldCom fraud. First, Betty Vinson, the company’s director of corporate reporting, gave into the pressure from the CFO to record the expenditures as capital rather than operating. She knew what the company was doing was wrong, but rationalized it by claiming her boss, Scott Sullivan, stressed it was a one-time request, and this kind of thing would not happen again. Vinson had shared that she felt that if she didn’t make the entries the company wanted, she wouldn’t be able to continue to work there. Vinson’s case is an example of the ethical slippery slope whereby once a person engages in wrongdoing, pressure exists to do the same later on. Indeed, that is what happened to Vinson.
The other worthwhile observation is that Cynthia Cooper was viewed as a hero because she took the action necessary to get the audit committee to act on her concerns and stop the fraud. She is a well-respected accounting professional who was named one of Time Magazine’s Persons of the Year in 2002. She has also been elected to the American Institute of CPAs Business Hall of Fame, the first woman to have been so honored.
Summing it Up
Whistleblowing is, arguably, one of the most difficult things to do in life. Most of us, I believe, have been faced with such situations. We may think:
- Should we speak up or remain silent?
- How far does our loyalty obligation go?
- To whom do we owe ultimate loyalty?
- To whom should we report wrongdoing (if chosen to do so)?
- What should we do if no action is taken?
- What should we do if we are retaliated against?
- Should we simply leave the organization?
Hopefully, my thoughts will be helpful to those of you reading this blog and provide “food for thought.”
Posted by Steven Mintz, aka Ethics Sage, on October 30, 2024. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.