Restricted Stock is on the Rise: What Does this Mean for Whistleblowing?

The use of restricted stock compensation to supplement or to give a bonus to executives is on the rise. What happens when things go wrong? Research finds that those in private companies are less likely to whistleblow than those in public companies overall. Literature also reveals that restricted stock may positively influence whistleblowing when large financial rewards are present. Further, vesting period and strike price influence whistleblowing for those with stock option compensation. Yet, little is investigated regarding whistleblowing related to the vesting period of the restricted stock and the type of organization -public or private- granting this compensation. We find that for those in public companies, whistleblowing tends to increase as the vesting period of the stock compensation is farther in the future. Those in private companies have the opposite behavior. Agency theory focused within whistleblowing theory helps resolve this seeming juxtaposition. Implications for practice and policy are offered.

Local Crime Environment and Corporate Financial Misconduct Using Benford’s Law

This study analyzes the impact of the local crime environment on the likelihood of a firm engaging in financial misconduct. Using the Benford Score metric, which assesses the extent to which a firm’s financial statement number distribution diverges from a theoretical distribution, I find that firms headquartered in high crime areas are associated with greater financial misconduct. The link is more pronounced in firms that offer more stock-based executive compensation to their executives or practice weak corporate governance, and change in the crime rate is associated with change in the firm’s financial misconduct. My results support the social norm, social learning, and environmental criminology theories, as well as the fraud triangle, and are robust to a number of alternative specifications and approaches. The evidence implies that a firm’s environment influences the level of corporate financial misconduct.

Taken for Suckers: Causal Attributions of the Consequences of Overcharging Sales Tax in Daily Deal Transactions

In an experimental setting, we examine consumer reactions in daily deal transactions when they are overcharged sales tax. The overcharges arise when the daily deal operators subsequently provide additional discounts to consumers unbeknownst to the merchants. Drawing on social status and attribution theories, we posit that consumers will ascribe causes for the overcharges to the merchants because of their lower status when compared to the higher status of the daily deal operators. We then examine the main and moderating effects of the overcharges on the behavioral intentions of consumers to repurchase from merchants. Merchants’ ability to verify correct sales prices, descriptive social norms, and the trust placed in tax accountants explain variations in repurchase intentions. Overall, the results suggest that ethical norm violations by higher-status entities results in the transfer of negative consequences to lower-status entities. Forensic accountants can be instrumental in helping businesses to understand these effects.

The Availability of Reporting Channels, Tone at the Top, and Whistleblowing Intentions

SOX requires the establishment of anonymous whistleblowing channels for public companies, but private companies are free to implement the channel(s) of their choosing. Although anonymous channels have long been considered a “best practice”, the evidence on their efficacy is mixed, creating confusion as to how private companies should proceed. Additionally, most studies comparing non-anonymous and anonymous channels have used a within-participants design, where both channels are available, limiting their ability to determine the incremental effectiveness of different whistleblowing systems. We find that offering either an anonymous channel or dual channels improves reporting intentions, relative to a non-anonymous channel, but primarily when tone at the top is weak. When tone at the top is strong, reporting intentions are not statistically different across the three systems. We also find no evidence that dual channels improve whistleblowing intentions relative to an anonymous channel, regardless of the tone at the top.

Who’s the BOSS? Analysis of a Fraud

Based on a real world, public company, $30 million embezzlement and financial statement fraud, this case helps students recognize red flags, analyze a situation using the fraud diamond, perform research and reflect on their own work experiences to support a belief, and conduct financial statement analysis. Its variety of activities are suitable for both undergraduate and graduate accounting students, and in-class and out of class learning. Because it is based on an actual fraud, it includes an epilogue with links to news stories and court documents, which improves student engagement with the material.

CAUGHT IN A COGNITIVE TRAP? AN EXAMINATION OF STUDENT HEURISTICS AND DEBIASING WHEN ANALYZING AN ACCOUNTING RESTATEMENT CASE STUDY

Student evaluations and judgments of the accounting method used in the restatement of financial statements by a public company for channel stuffing are examined. To reduce any heuristics and biases that may have affected student judgments, a group brainstorming method was incorporated to supplement individual assessments made by the students. The case study was administered to 206 students in three student groups: non-degree, justice school and business school students. Qualitative evidence about the efficacy of the use of the brainstorming technique is provided. Between-subjects’ assessments of the accounting restatements show that justice school and business school students are more likely than non-degree students to disagree with the assessment that the restatement was appropriate. Empirical evidence was also found for the presence of social identity bias between business school and justice school students’ evaluation of sanctions. Implications on the use of behavioral techniques in accounting and ethics education are discussed.

The Effect of Whistleblower Source and Tip Frame on Internal Auditors’ Judgments and Actions

The literature on assessments of whistleblower tips is limited and many unanswered questions exist. This study investigates the assessment of anonymous whistle blower tips by participants acting as internal auditors and the actions that ensue. Two-hundred sixteen participants rated the likelihood and seriousness of fraud and the investigative resources applied based upon a written script. Results suggest that the wording utilized by a tipster impacts fraud likelihood assessments which in turn impacts tip importance assessments. The source of the tip was not significant in either assessment. Fraud likelihood assessments and tip importance assessments influence the experience level of the personnel assigned to investigate the tip while tip importance also influences the hours assigned to investigate the tip. Finally, the frame of the tip has a significant indirect effect on the experience assigned and the hours assigned, mediated by fraud likelihood and tip importance assessments.

Should I Blow the Whistle on My Boss? An Investigation of the Effects of Emotional Intelligence and Consequence Framing on the Subordinates’ Whistleblowing Intentions

Given that whistleblowing is considered an effective measure to prevent and detect fraud, we experimentally examine select factors that may impede a subordinate tipster to act when the leader is involved. Specifically, we examine the effects of the subordinate’s emotional intelligence, the leader’s emotional intelligence, and the consequence framing of outcomes to the company and the leader on the intention of the subordinate to blow the whistle. We found that when a leader is involved in a fraud and has a high emotional intelligence, the subordinate is less likely to blow the whistle. Moreover, the subordinate is more likely to blow the whistle when the outcome consequence is framed as being positive to the organization relative to being negative to the leader when the leader has a high emotional intelligence. This study makes scholarly contributions to the whistleblowing literature and has important practical implications in the anti-fraud arena.

National culture and occupational fraud magnitude: The moderating role of fraud type

This study investigates the relationship between national culture and the magnitude of occupational fraud. Guided by national culture theory and economic theory of crime, we propose that a country’s culture, as measured by Hofstede’s six national culture dimensions: power distance, individualism, achievement orientation, uncertainty avoidance, long-term orientation, and indulgence, is related to the magnitude of occupational fraud. Further, we propose that the type of fraud moderates this relationship. We test these effects using a two-level model on a dataset of 2,898 occupational fraud cases across 41 countries. We find that uncertainty avoidance and long-term orientation display significant positive association with occupational fraud magnitude (while power distance and achievement orientation display marginally significant positive association). Further, the effects of achievement orientation, uncertainty avoidance, and indulgence are moderated by fraud type (while power distance and long-term orientation show marginally significant interaction effects).

Fraud and Governance: The Importance of People

This paper describes my professional journey focusing on human aspects of fraud and corporate governance. I describe the initial “light bulb” moments that highlighted the importance of people and the years of human-focused fraud and governance research and teaching since those events. I summarize key insights from a variety of human-focused research projects, and I develop research themes focused on skills, signals, relationships, fairness, and persuasion (with bad intent). I also provide avenues for future research within each theme. I encourage others to keep the importance of people at the forefront as we address fraud and governance issues. Over time, our systems, regulations, and organizations will change, but we will still have people at the center of our fraud and governance challenges.