Financial awards can unintentionally discourage a whistleblower from reporting fraud in a timely manner by hijacking their moral motivation to do the right thing, according to a new study.
The study by researchers at Florida Atlantic University, Wilfrid Laurier University in Ontario and Providence College in Rhode Island — “Hijacking the Moral Imperative: How Financial Incentives Can Discourage Whistleblower Reporting” — was recently published in Auditing: A Journal of Practice & Theory.
According to the study, recent evidence indicates that the most common means of initial fraud detection is the receipt of a whistleblower tip and that nearly 40% of all discovered frauds are uncovered in this manner.
A number of companies and regulatory agencies currently offer, or are considering offering, financial incentives to encourage whistleblowers to report unethical behavior. An increasingly common feature of these whistleblower incentive programs is the application of minimum value thresholds for reward eligibility, according to the study.
For example, the study points to incentive programs administered by the Securities and Exchange Commission and the Internal Revenue Service that only provide financial incentives if the reporting leads to a recovery exceeding a specified minimum threshold of $1 million and $2 million, respectively.
The study examines whether the inclusion of minimum threshold features can “unwittingly” increase the likelihood that certain identified frauds will go unreported.
While conventional wisdom suggests that financial incentives will help to motivate whistleblower reporting, the study finds that this may not be the case.
“When you mention financial incentives to potential whistleblowers, you change the decision frame from ‘doing the right thing’ to that of a cost-benefit analysis,” James Wainberg, assistant professor of accounting at FAU’s College of Business, said in a statement. “As a result, when the perceived risks of reporting are greater than the potential rewards, people will be much less likely to report frauds than had they not been told about the existence of an incentive program to begin with.”
Wainberg is a co-author of the study, along with Leslie Berger, assistant professor of accounting at Wilfrid Laurier University, and Stephen Perreault, associate professor at Providence College School of Business.
Wainberg, Berger and Perreault look at this shift from intrinsic to extrinsic motivation, which is often referred to as “motivational crowding.”