This column originally appeared on the Saporta Report Thought Leadership website on Oct. 22, 2018.
By Flora Zhou, Assistant Professor of Accountancy, J. Mack Robinson College of Business, Georgia State University
Firms are under increasing pressure to implement effective internal whistleblowing systems to avoid the potential Securities and Exchange Commission (SEC) investigation, fines and negative publicity associated with external whistleblowing. While firms can provide incentives to encourage internal whistleblowing, it remains controversial how such incentives should be structured.
Is it more effective to reward whistleblowing or to penalize failure to do so? And what is the impact of descriptive norms, the expectations about what others will do, versus injunctive norms, the expectations about what one ought to do?
A study I conducted with Clara Xiaoling Chen and Jennifer E. Nichol found that penalties, not rewards, lead to a greater increase in internal whistleblowing when descriptive norms supporting whistleblowing are stronger. A penalty for not reporting suggests that whistleblowing is one’s obligation, whereas a reward implies that whistleblowing is not necessarily a part of one’s normal responsibilities.
A penalty contract, which suggests a strong injunctive norm for whistleblowing, combined with strong descriptive norms supporting whistleblowing, leads to the highest level of internal whistleblowing.
The findings suggest that firms that desire to encourage internal whistleblowing should implement penalties for whistleblowing and focus on increasing the strength of the firm’s descriptive norms for it.
Assistant Professor of Accountancy
J. Mack Robinson College of Business
Zhou’s research focuses on auditor, investor and manager decision making, using techniques from applied game theory, experimental economics and psychology.