The influence of organizational justice on accountant whistleblowing

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The inﬂuence of organizational justice on accountant whistleblowing

Deborah L. Seifert

^a

, John T. Sweeney

^b,^⇑

, Jeff Joireman

^c

, John M. Thornton

^b

aDepartment of Accounting, Illinois State University, Normal, IL, USA

bDepartment of Accounting, Washington State University, Pullman, WA, USA

cDepartment of Marketing, Washington State University, Pullman, WA, USA

a r t i c l e i n f o a b s t r a c t

In this research study, we apply the theory of organizational justice to the design of whistleblowing policies and procedures. As a pro-social behavior, we posit that employee whistleblowing is likely to increase when organizational whistleblowing procedures, outcomes, and related exchanges with superiors are perceived as fair. We test our hypotheses with an experiment involving 447 internal auditors and management accountants. Our results indicate that whistleblowing policies and mechanisms incorporating higher levels of procedural justice, distributive justice, and interactional justice were perceived to increase the likelihood that an organizational accountant would internally report ﬁnancial statement fraud.

1. Introduction

In the preceding decade, the enormous economic and social costs of financial statement fraud has shaken mar- kets, devastated investment portfolios, and reduced confi- dence in financial reporting. Many of these frauds were revealed not by external auditors or analysts, but by the disclosures of employees who were privy to accounting information. As a consequence, regulators worldwide have recognized the importance of whistleblowing in both deterring and detecting financial malfeasance, and have instituted legislation intended to promote employee reporting of corporate fraud (Schmidt, 2005).

A core assumption of much of this legislation, such as the Sarbanes-Oxley Act in the United States, is that well- designed structural mechanisms can be inﬂuential in motivating whistleblowing (Miceli, Near, & Dworkin, 2008). We test this proposition by applying the tenets of organizational justice to the construction of whistleblowing

policies and procedures. In a between-subjects experiment involving a sample of 232 internal auditors and 215 management accountants, we manipulate two levels (high/

low) of the procedural, interactional, and distributive fairness dimensions of organizational whistleblowing across eight case scenarios involving ﬁnancial statement fraud.

Our statistical analyses indicate signiﬁcant main effects for each of the fairness manipulations, with higher levels of procedural, interactional, and distributive justice positively affecting the perceived likelihood of whistleblowing.

The results also reveal a main effect for gender, with female organizational accountants perceiving a higher likelihood of employee disclosure of ﬁnancial statement fraud.

This study represents an experimental approach to identifying actions or policies that encourage internal reporting of wrongdoing (Miceli et al., 2008).¹We add to the research literature addressing accountants as whistleblowers (Arnold & Ponemon, 1991; Brennan & Kelly, 2007;

Kaplan, 1995; Kaplan & Whitecotton, 2001; Patel, 2003) by differentiating among legislative models to guide and focus our thinking about whistleblowing. This research also

doi:10.1016/j.aos.2010.09.002

⇑Corresponding author. Tel.: +1 509 335 8541; fax: +1 509 335 4275.

E-mail addresses:[email protected](D.L. Seifert),[email protected] (J.T. Sweeney),[email protected](J. Joireman),[email protected] (J.M. Thornton).

1 Consistent withBrennan and Kelly (2007), we broadly characterize whistleblowing as the reporting of an actual or suspected wrongdoing.

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contributes to the growing body of literature that examines the importance of organizational justice to accountants (Parker & Kohlmeyer, 2005; Sweeney & Quirin, 2009). We ﬁnd that internal auditors and management accountants are sensitive to the fairness of organizational whistleblowing policies and procedures. Our results suggest that management can positively impact the internal disclosure of ﬁnancial statement fraud by incorporating principles of organizational justice in the design and execution of structural whistleblowing policies and procedures.

2. Theoretical development 2.1. Models of whistleblowing

The effectiveness of whistleblowing as a mechanism for the discovery of corporate malfeasance was underscored with the disclosure of two of the largest ﬁnancial reporting deceptions in United States history: Enron and WorldCom (Bowen, Call, & Rajgopal, 2010). The revelations of these two frauds were credited respectively to whistleblowers Sherron Watkins and Cynthia Cooper, who subsequently sharedTIMEmagazine’s 2002 ‘‘Persons of the Year” award.

Following the bursting of the stock market bubble and a related procession of corporate accounting breaches, the Uni- ted States Congress passed the Corporate Criminal Fraud Accountability Act in July of 2002, commonly known as the Sarbanes-Oxley Act (Act) (2002). The Act contained provisions (Sections 301 & 806) speciﬁcally designed to encourage whistleblowing and to provide protection from retaliatory actions directed at employees disclosing ‘‘questionable accounting or auditing matters.”²In light of Enron, WorldCom, and other high-proﬁle fraud disclosures, the celebrity status of some whistleblowers, and the impetus provided by the Act, it would not be unreasonable to assume that employees can serve as internal corporate monitors.

In the years subsequent to the passage of the Act, however, the efficacy of its whistleblowing provisions in motivating employee reporting of corporate accounting fraud has been limited (Dworkin, 2007; Moberly, 2006).Dyck, Morse, and Zingales (2007)identified the initial disclosure source for 230 high profile, large company (over $750 mil- lion in assets) frauds occurring during the period 1996–

2004. The percentage of ﬁnancial statement frauds origi- nally disclosed by employee whistleblowers declined after the passage of the Act, from 20.7% to 15.6%. Furthermore, even when employee whistleblowers have been credited with exposing large scale ﬁnancial statement frauds, the hoax was frequently in operation over an extended period of years and involved a network of participants (Moberly, 2006). Many of these participants were organizational accountants involved in the creation and maintenance of sophisticated and often nuanced accounting deceptions that passed by the watchful eyes of external auditors and company analysts. It is likely that the accounting expertise

of whistleblowers Watkins and Cooper was a prerequisite skill in understanding the existence, extent, and nature of the frauds. It is also likely that many other accountants and employees at Enron and Worldcom had reason to be- lieve that the ﬁnancial numbers were inaccurate, but chose to remain silent (Macey, 2007; Schmidt, 2005).³

Research involving accountants’ whistleblowing has often focused on policies, procedures, and situational characteristics that may encourage whistleblowing, the impact of potential retaliation on the decision to whistle blow, and the influence of reward systems. In their study of trainee external auditors, the results ofBrennan and Kelly (2007) suggest that formal structures for whistleblowing and internal (versus external) reporting channels increase the likelihood of the subjects’ reporting of an ethical violation by an audit partner.Kaplan (1995)found that audit seniors were more(less) likely to report audit staff for premature sign-off behavior when the audit step was a (un)necessary test, and the staff member had a poor(good) performance history. Senior auditors were also more likely to report a manager’s ethical violation when the perceived personal costs of disclosure were low or when personal responsibility for reporting was perceived to be high (Kaplan & White- cotton, 2001). Arnold and Ponemon (1991) found that internal auditors faced with an increasing expectation of retaliation were less likely to whistle blow. The results of Xu and Ziegenfuss (2008)indicated that internal auditors were more likely to report wrongdoing when rewards were provided to whistleblowers. The results of these studies, however, may be applicable only under specific whistleblowing regimes. For example, a truly anonymous internal reporting channel may be a positive structural mechanism for promoting whistleblowing (Kaplan, Pany, Samuels, & Zhang, 2009), potentially reducing or eliminat- ing the threat of retaliation, but it may be irrelevant when the whistleblower’s reporting is motivated by financial reward. One approach to thinking about whistleblowing and to identifying the conditions under which the results of a study may hold is to specify the regulatory or legislative environment where the research takes place.

There are three principal legislative models intended to motivate whistleblowing. The Reward Model provides monetary payments for whistleblowing, and evidence indicates that incentives are effective in motivating disclosure of wrongdoing (Dworkin, 2007; Dyck et al., 2007). The Sar- banes-Oxley Act, however, does not provide for compensa- tion to employees who reveal accounting frauds. The whistleblower provisions of the Act do, however, fall under both the Protective or Anti-retaliation Model and the Structural Model (Moberly, 2006). Of these two ap- proaches, the anti-retaliation provisions of the Act have received more attention than the structural provisions in the academic and non-academic literatures (Bame-Aldred, Sweeney, & Seifert, 2007; Miceli et al., 2008; Moberly, 2006). The Anti-retaliation Model assumes that the fear of retaliation prevents most observers of wrongdoing from reporting it (Dworkin, 2007; Dworkin & Near, 1997).

2 The commonly accepted deﬁnition of whistleblowing, ‘‘the disclosure by organization members (former or current) of illegal, immoral, or illegitimate practices under control of their employer to persons or organizations that may be able to effect action,” (Miceli & Near, 1984, 1992), is consistent with its characterization in the Act (Moberly, 2006).

3Watkins, for example, in her letter to Enron CEO Lay, warned that discontented employees aware of the accounting manipulations could potentially expose the fraud (Macey, 2007).

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Research, however, has indicated that anti-retaliation statutes are largely ineffective in motivating whistleblowing (Dworkin, 2007; Dworkin & Near, 1987, 1997; Miceli et al., 2008), and legal scholars contend that the speciﬁc protections provided by the Act to whistleblowers are relatively narrow in scope and more illusory than real (Dwor- kin, 2007; Earle & Madek, 2007; Miceli et al., 2008;

Watnick, 2007). In fact, by the end of 2009 the US Depart- ment of Labor had ruled in favor of only 21 out of 1455 complaints of retaliation against whistleblowers under the Act, and dismissed 996 cases (Lenitz, 2009).⁴

Given that the US Congress chose not to incentivize employees who disclose corporate accounting fraud, and that the anti-retaliation provisions of the Act have proven largely ineffective, the focus of this research is on corporate policies and management behaviors that may impact an employee’s decision to reveal a potential accounting fraud.

The Structural Model is premised on the assumption that when a company establishes a visible, earnest, and formal internal channel for disclosing wrongdoing, employees are more likely to report misconduct (Moberly, 2006). In con- trast to the adversarial nature of the Anti-retaliation Mod- el, the prosocial nature of employee whistleblowing underlies the Structural Model (Moberly, 2006; Treviño &

Weaver, 2001).⁵

2.2. Organizational justice

Consistent with its conceptualization under the Struc- tural Model, in prior accounting research (Brennan & Kelly, 2007; Xu & Ziegenfuss, 2008), and by whistleblowing researchers (Dozier & Miceli, 1985; Miceli et al., 2008), we characterize internal employee whistleblowing as a pro-social behavior that includes both voluntary and role-related disclosures of wrongdoing. A pro-social behavior is broadly defined as any action by an organizational member that attempts to benefit the person(s) to whom it is directed (Brief & Motowidlo, 1986). We recognize, however, that not all whistleblowing is intended to be so- cially beneficial. Some specific incidents have been prompted by antisocial reasons such as revenge or retaliation (Miceli et al., 2008). The motivation for whistleblowing does not need to be solely altruistic to be classified as prosocial, but may instead be triggered by egotistical mo- tives (Brennan & Kelly, 2007). Requiring whistleblowing to be based solely on altruistic intentions, absent any direct or indirect benefit to the actor, would mean ‘‘there would be virtually no whistleblowing” (Miceli et al., 2008, p.

37). Whistleblowers often receive some gain from their action, including cessation of the offensive practice, recogni- tion, and reward.

The theory of organizational justice has the potential to contribute to the implementation of effective whistleblowing mechanisms because research has indicated a positive relationship between its justice dimensions and pro-social behaviors (Bies, Martin, & Brockner, 1993; Cohen-Charash

& Spector, 2001; Colquitt, Wesson, Porter, Conlon, & Ng, 2001; Eskew, 1993; Greenberg, 1993; Moorman, 1991;

Moorman, Niehoff, & Organ, 1993; Podsakoff & MacKenzie, 1993; Robinson & Morrison, 1995).⁶Employees who perceive that they are treated fairly by their employer are more likely to frame the relationship as based upon mutual social exchange, advancing behaviors intended to beneﬁt the organization, such as whistleblowing (Cohen-Charash & Spector, 2001; Moorman, 1991; Organ, 1988; Podsakoff, MacKenzie,

& Hui, 2000). Organizational justice theory provides a framework for the design of structural mechanisms intended to increase the likelihood of internal employee whistleblowing.

Organizational justice is comprised of three dimensions: distributive, procedural, and interactional fairness (Colquitt et al., 2001), and each of these dimensions has the potential to affect the likelihood of internal employee disclosure of wrongdoing. Surveys of whistleblowers and anecdotal evidence have indicated that in addition to the seriousness of the wrongdoing and the presence of strong evidence, the factors most important in motivating whistleblowing are clear channels for reporting the wrongdoing, an atmosphere that encourages disclosure, and the perceived likelihood that management will correct the practice (Callahan & Dworkin, 1994; Dworkin, 2007; Miceli

& Near, 1984). The last three factors are structural in nature, controllable by company management, and consistent with procedural, interactional, and distributive fairness, respectively.

Previous research examining the relationship between organizational justice and whistleblowing is limited.Tre- viño and Weaver (2001)formally tested the relationship among perceptions of general organizational justice, ethics program follow-through, and actual whistleblowing with survey data collected from over 1700 randomly selected employees across four organizations. Perceived fair treatment and ethics program follow-through resulted in less observed unethical conduct and more reporting of ethical violations. Fair treatment in general and ethics program follow-through acted independently with regard to whistleblowing. Ethics program follow-through had less impact on unethical conduct when employees perceived that their organization was fair in general.

2.3. Distributive justice

Distributive justice focuses on the fairness of outcomes, and was the ﬁrst dimension of organizational justice to be identiﬁed (Adams, 1965). Although the choice of standards for measuring the fairness of outcomes may differ with context, organizational goal, and personal motive (Deu- tsch, 1975), the primary goal is that distributions or resolu- tions are perceived as fair.

Miceli and Near (1992, p. 299)contend that ‘‘the most powerful reward an organization may be able to offer whistleblowers is its willingness to correct wrongdoing.”

Prior literature has proposed that the fair resolution of a whistleblowing complaint should increase the reporting

4Lewis (2008)concludes that the whistleblower protection provisions in the United Kingdom’s Public Interest Disclosure Act are also ineffective.

5For a review of the whistleblowing literature, seeMesmer-Magnus and Viswevaran (2005), andMiceli et al. (2008).

6 The terms ‘‘justice” or ‘‘fairness” are often used interchangeably in organizational research (Konovsky, 2000), and we employ the terms synonymously.

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of wrongdoing (Finn, 1995; Miceli et al., 2008). Thus, the cessation of the wrongdoing would be the desired ‘‘fair”

outcome from the whistleblower’s perspective (Miceli &

Near, 1992). Distributive justice would imply that whistleblowers who risk retaliation to report wrongdoing would expect the organization to reciprocate by investigating the complaint and stopping the wrongdoing (Adams, 1965; Miceli & Near, 1992).

Research has linked increased distributive justice to increased pro-social behaviors (Cohen-Charash & Spector, 2001; Colquitt et al., 2001; Robinson & Morrison, 1995).

Therefore, internal disclosure of wrongdoing should be positively impacted when whistleblowing mechanisms are consistent with distributive justice. To test the relationship between distributive justice and whistleblowing, the following hypothesis is posited.

H1.Fair outcomes will be positively related to the perceived likelihood of internal whistleblowing.

2.4. Procedural justice

Procedural justice focuses on fair processes, and was the second justice dimension to emerge from organizational justice research. The consistency of procedures, freedom from bias in carrying out procedures, accurate information for making procedural decisions, correction of inaccurate procedural decisions, conformity of procedures with prevailing standards of ethics, and the consideration of group opinions when carrying out procedures are included under the umbrella of procedural justice (Colquitt et al., 2001;

Leventhal, Karuza, & Fry, 1980).

Prior survey research indicates that to increase the reporting of wrongdoing, formal whistleblowing policies and procedures should be consistent and unbiased (i.e., fair) (Miceli & Near, 1992; Near, Dworkin, & Miceli, 1993;

Treviño & Weaver, 2001). The stream of literature linking increased procedural justice with other pro-social behaviors provides support for the position that procedural fairness should increase whistleblowing (Bies et al., 1993;

Cohen-Charash & Spector, 2001; Colquitt et al., 2001; Es- kew, 1993; Greenberg, 1993; Moorman et al., 1993; Pod- sakoff & MacKenzie, 1993).

H2.Fair reporting procedures will be positively related to the perceived likelihood of internal whistleblowing.

2.5. Interactional justice

Interactional justice focuses on the quality of interpersonal treatment that employees receive from superiors when organizational procedures are implemented (Bies &

Moag, 1986). Interactional justice has an interpersonal component that reﬂects the degree to which individuals are treated with dignity and respect by those executing procedures or determining outcomes, and an informational component, emphasizing justiﬁcation for decisions and truthfulness (Greenberg, 1990; Scott, Colquitt, & Zapata- Phelan, 2007). Perceptions of interactional justice are

formed largely from frequent personal exchanges between managers and subordinates.

Although an organization may have a fair, formal proce- dure in place for the reporting of wrongdoing, it is possible that unfair, informal interactions between the whistleblower and management could undermine the formal process (Miceli & Near, 1992; Near et al., 1993). For example, threats of retaliation from a supervisor could be of special concern to employees who are contemplating blowing the whistle (Mesmer-Magnus & Viswevaran, 2005; Miceli &

Near, 1992; Miceli et al., 2008). Prior research suggests that fair interactions (i.e., interactional justice) between a whistleblower and a supervisor can increase the reporting of wrongdoing (Miceli & Near, 1992; Near et al., 1993). Fair interactions would result from the supervisor treating the whistleblower with dignity and respect, as well as not making threats of retaliation (Miceli & Near, 1992; Miceli et al., 2008).⁷Mesmer-Magnus and Viswevaran (2005)contend that perceived support from supervisors is instrumen- tal in the whistleblowing decision. Therefore, the following hypothesis is proposed.

H3. Fair interactions with management will be positively related to the perceived likelihood of internal whistleblowing.

3. Research methodology 3.1. Sample and data collection

Two types of organizational accountants were targeted as subjects: internal auditors and management accountants. Internal auditors were selected because searching for and disclosing ﬁnancial reporting irregularities is a normal part of the job role. Management accountants were selected because they may be in a position to observe, participate in, or have knowledge of ﬁnancial statement fraud.

Permission was granted by the Institute of Internal Auditors (IIA) and the Institute of Management Accoun- tants (IMA) to distribute the case materials to members attending monthly chapter meetings at various locations across the United States. The IIA Code of Ethics (IIA, 2009) requires that members ‘‘shall observe the law and make disclosures expected by the law and the profession”;

and ‘‘shall disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review” (see ‘‘Distributive justice”).” Whistleblowing is not required under the guidelines of the IMA.⁸

To generate the sample size utilized in this study, we accessed 26 chapters of the IIA and 49 chapters of the IMA across diverse regions of the US. As a result, we relied on chapter contacts to deliver the research materials.

Variation across chapters in the administration of the

7Zhang (2008)found that the agents’ perceived fairness of the principal plays an important role in determining agents’ behaviors under a peer reporting system with a whistleblowing function.

8Both the IIA and IMA are private organizations and have little authority over their members, as neither is a licensing body and therefore the extent of any disciplinary action would be expulsion.

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distribution process may have impacted the selection of participants and therefore represents a potential limitation of the study. Cases were randomized within chapters, and the chapter contact was provided with instructions for dis- tributing the experimental materials to chapter members in attendance. The case materials were designed to be self-administered and consisted of instructions, a single case, and a demographic questionnaire contained in a post- age-paid envelope addressed to one of the researchers.

A total of 1365 internal auditors and 1311 management accountants were invited to participate in the study, repre- senting 26 IIA chapters and 49 IMA chapters located in the United States. Of the 2676 instruments delivered to IIA and IMA chapters, 608 (23%) were returned to the researchers.

The return rate did not differ between internal auditors and management accountants, and is similar to the 25%

rate experienced in prior research accessing subjects through the IMA (Jones & Hiltebeitel, 1995).

Five questions were used to check participants’ comprehension of the stimulus materials. Ninety-seven participants who incorrectly answered one or more of ﬁve comprehension checks were dropped from the analysis, and 64 were excluded from the analyses because of missing data or job descriptions/titles (CPA partner, student, etc.) not consistent with either internal auditor or management accountant. The ﬁnal sample of 447 subjects represents 17% of the experimental instruments distributed.

Inclusion in the analyses of subjects dropped for comprehension check failures or non-targeted job descriptions does not change the results.⁹ Demographic information for the respondents in the ﬁnal sample of 232 internal auditors and 215 management accountants is presented in Table 1.

The participants collectively represent a seasoned pool of organizational accountants, with the internal auditor group averaging 19 years of professional work experience,

and the management accountants’ averaging almost 21 years. Over 58% of the participants were in either super- visory, management, or executive positions. Approximately a third of the sample occupied staff positions, and therefore may lack the experience required to identify complex accounting frauds. Over half of the sample was female.

To assess subjects’ perceived responsibility regarding whistleblowing, we asked whether they were required to report wrongdoing as part of their job. Of the internal auditor subjects, 98% indicated they were required to report wrongdoing, as did 94% of the management accountants.

Additionally, the subjects were asked whether they had ever reported wrongdoing. Of the sample, 56% of the internal auditors and 40% of the management accountants had previously reported wrongdoing, indicating a relatively large proportion (49%) of the research subjects were experienced whistleblowers. Signiﬁcantly more internal auditors than management accountants reported wrongdoing (p< .001), usually through internal audit reports.

3.2. Measures

The hypotheses were tested with a 222 factorial between-subjects experimental design. Factorial levels manipulated fair/unfair whistleblowing: (1) procedures, (2) interactions with management, and (3) outcomes, pro- ducing eight vignettes. The vignettes were presented in the third-person to minimize self-report bias (Arnold & Pone- mon, 1991) and measured subjects’ perception of the likelihood that the focal third-person would report internally a potential accounting fraud. Utilizing a case vignette to manipulate situational variables is consistent with many prior studies of whistleblowing (Mesmer-Magnus &

Viswevaran, 2005; Miceli et al., 2008); however, by measuring perceptions rather than actual whistleblowing behavior, our experimental design may lack the richness of a real world situation. The cases were pretested with undergraduate accounting students.

The example of organizational wrongdoing in the vignettes involves the probable recording of material false revenues and was based on an actual incident of fraud. The justice dimensions were manipulated to reﬂect fair/unfair whistleblowing policies and procedures, and were adapted from the whistleblowing policies and procedures of the Proctor and Gamble Corporation (Proctor, 2005). We selected the Proctor and Gamble Corporation as a model of fairness because it received the United Kingdom (UK) Spe- cial Award 2004, ‘‘Most Whistle-Blowing Friendly Culture.”

The whistleblowing policies chosen are consistent with the recommendations ofMiceli, Near, and Dworkin (2009). The vignettes incorporating unfair whistleblowing procedures and policies were framed to be the converse of the fair condition.

Prior literature guided the construction of fair/unfair variables in the vignettes.Leventhal et al. (1980)described components of procedural justice as the consistency of procedures and the freedom of bias. The organizational whistleblowing policies explained that the company provided an anonymous reporting channel, and that the company would protect the whistleblower. Fair whistleblowing procedures were therefore portrayed as the com- Table 1

Demographic summary.

Internal auditors (n)

Management accountants (n)

Total (n)

Gender:

Male 106 110 216

Female 126 104 230

Missing data 1 1

Current job level:

Staff 109 73 182

Supervisor 25 24 49

Manager or executive 95 117 212

Missing data 3 1 4

Years of work experience:

Mean 19.05 20.78 19.88

Median 20.00 22.00 20.00

Standard deviation 10.11 9.92 10.05

Age in years:

Mean 43.45 44.52 43.97

Median 44.00 45.00 45.00

Standard deviation 10.84 10.05 10.47

9A comparison of early and late responders revealed no difference in the likelihood that fraud would be reported (the dependent variable).

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pany consistently following policy, while unfair procedures were described in violation of the organizational policy.

Bies and Moag (1986)describe interactional justice as treating others with respect, politeness, and dignity, as well as providing truthful information and explanations. There- fore, fair interactions in the vignettes were operationalized as the supervisor explaining the whistleblowing policy (informational component) and demonstrating politeness, dignity, and respect to potential whistleblowers (interpersonal component). Unfair interactions with management were portrayed as the supervisor explaining the whistleblowing process in an insincere manner and projecting a threatening demeanor to potential whistleblowers.

Consistent with the results of Treviño and Weaver (2001), a fair outcome (distributive justice) from the whistleblowing process was operationalized in the vignettes as the company honoring a previous whistleblower’s effort and risk by investigating the complaint and stopping the wrongdoing. An unfair outcome was presented as the company failing to investigate and stop the reported wrongdoing.

Each vignette was followed by the dependent variable of interest, the perceived likelihood that Alex, a senior accountant and the potential whistleblower, would report internally an intentional overstatement of revenue by the company CFO. The subjects indicated their response on a nine-point Likert scale anchored on (1) Deﬁnitely will not report, to (9) Deﬁnitely will report, with the midpoint an- chor (5) indicating a 50% likelihood of reporting. The case scenario and manipulations are presented in the Appendix.

3.3. Manipulation checks

Participants rated on 7-point scales (1 = strongly dis- agree, to 7 = strongly agree) the extent to which they be- lieved that the corporation’s procedures were fair (procedural justice check), that Alex’s supervisor treats those who report ethics violations fairly (interactional justice check), and that the corporation resolves ethical violations fairly (distributive justice check). Each of the three manipulation check ratings were submitted to a 2 (Proce- dural Justice)2 (Interactional Justice)2 (Distributive Justice) ANOVA. The analyses revealed signiﬁcant main effects (p< .001) of the three justice manipulations on their respective justice manipulation checks, with subjects in the high conditions reporting signiﬁcantly stronger agree- ment that the corporation’s whistleblowing procedures, treatment of whistleblowers, and resolution of reported violations were fair than those in the low conditions. Col- lectively, the results of the analyses indicate that the experimental manipulations were successful in differentiating high fairness conditions from low fairness conditions for procedural, interactional, and distributive justice.

4. Results

4.1. Primary analyses

Prior to testing for the hypothesized main effects, we ran several analyses exploring whether the predicted ef-

fects would depend on age, gender, current position (internal auditor versus management accountant), and/or whether the participant had previously reported a wrongdoing. In each analysis, the control variable of interest was included as an additional predictor, and main effects for the control variable and interactions between the control variable and the primary independent variables of interest were examined. These analyses revealed a main effect for gender (p< .02), and signiﬁcant interactions between the three justice variables and current position. When gender and current position were included in the same analysis, the latter’s interaction effects were not dependent upon gender. Accordingly, for our ﬁnal analysis, we conducted a 2 (procedural justice)2 (interactional justice)2 (distributive justice)2 (current position) between-subjects ANOVA with gender as a (main effect) control variable.

Consistent withH1, a signiﬁcant main effect was found for distributive justice, F(1, 429) = 51.97, p< .001, with subjects in the high distributive justice condition reporting

Fig. 1.Whistle blowing as a function of procedural justice and current position.

Fig. 2.Whistle blowing as a function of distributive justice, interactional justice, and current position.

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a higher likelihood of whistleblowing (M= 6.02) than those in the low condition (M= 4.94). As predicted inH2, the results revealed a significant main effect for procedural justice, F(1, 429) = 39.22,p< .001, with subjects in the high procedural justice condition reporting a higher likelihood of whistleblowing (M= 5.95) than those in the low condition (M= 5.01). Finally, in support ofH3, the results indicated a significant main effect for interactional justice, F(1, 429) = 65.35,p< .001, with subjects in the high interactional justice condition reporting a higher likelihood of whistleblowing (M= 6.09) than those in the low condition (M= 4.88). As noted, gender was significant in the model, F(1, 429) = 6.75,p< .001, with women more likely to perceive a higher likelihood of whistleblowing (M= 5.70) than men (M= 5.26).

The ANOVA model also indicated the presence of two higher-order interactions involving current position. First, we observed a significant interaction between procedural justice and current positionF(1, 429) = 3.84, p= .05. This interaction is shown inFig. 1. As can be observed, while high procedural justice led to a perception of increased whistleblowing among both subject groups, management accountants perceived a higher likelihood of whistleblowing than internal auditors under the low procedural justice condition. Second, a significant interaction occurred between distributive justice and current position, F(1, 429) = 7.34,p< .01. This interaction was, however, further qualified by a significant three-way interaction among interactional justice, distributive justice, and current position, F(1, 429) = 5.64, p< .02. As such, we proceed to an interpretation of the higher-order interaction, displayed inFig. 2. As indicated in the figure, low distributive justice led to reduced whistleblowing in all cases except for management accountants in the high interactional justice condition. Thus, high interactional justice provides a buffer against the negative impact of low distributive justice on whistleblowing for management accountants.

4.2. Mediation analyses

We next tested whether perceptions of justice indicated by the manipulation check ratings mediated the relationship between their respective manipulation and whistleblowing. To test these models, we conducted three path analyses. Summaries of these analyses are shown in Fig. 3and inTable 2. In each case, the respective models fit the data well, and all path coefficients were significant (p< .001). In sum, these results suggest that the procedures used to experimentally manipulate distributive justice, procedural justice, and interactional justice impacted whistleblowing through participants’ perceptions of a fair resolution (distributive fairness), fair procedures (procedural fairness), and fair interactions with the supervisor (interactional fairness), respectively.

5. Conclusion

The retaliation protections and structural provisions of the Sarbanes-Oxley Act, in conjunction with the public ac- claim directed at high-proﬁle whistleblowers (Lacayo and Ripley, 2002), may have justiﬁed the initial optimism in the potential of whistleblowers as corporate monitors.

From another perspective, however, the accounting frauds of recent decades could also be viewed as evidence that employee whistleblowers are not the corporate equivalent

.61 .50

DJ Manipulation Perceived DJ WB

.37 .40

PJ Manipulation Perceived PJ WB

.85 .42

IJ Manipulation Perceived IJ WB

(Note: All coefficients are significant at p < .001).

Fig. 3.Standardized path coefficients for path analyses on distributive justice, procedural justice, and interactional justice. (Note: All coefficients are significant atp< .001).

Table 2

Summary of ﬁt statistics for path analyses.

Model v² p GFI CFI RMSEA

Distributive justice 0.60 .45 .99 1.00 .00

Procedural justice 3.31 .07 .99 .98 .07

Interactional justice 2.90 .09 .99 .99 .07 Note: Refer toFig. 3for standardized path coefﬁcients.

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of the ‘parakeet in the mine shaft.’ As Moberly (2006) notes, the accounting frauds at Enron, WorldCom, Parma- lat, and HealthSouth occurred over an extended period of years, and participation in and knowledge of these deceptions were not limited to a few executives. At some level of involvement, a relatively large number of lower-tier accounting employees were exposed to the frauds, but re- mained silent.

Internal auditors and management accountants were chosen as subjects in this study because they have the abil- ity to understand ﬁnancial statement fraud and, due to the nature of their organizational roles, may acquire early knowledge of a fraud. The 447 internal auditors and management accountants involved in the experiment averaged approximately 20 years of accounting experience, and 49%

reported that they had previously disclosed some type of wrongdoing within their organization. The relatively high percentage of whistleblower participants supports the eco- logical validity of the study and suggests that many organizational accountants are exposed to wrongdoing during their careers.

This study proposes that under the Structural Model of whistleblowing, the theory of organizational justice provides a framework for the design of policies and procedures that may improve the likelihood of organizational accountants’ internal disclosure of wrongdoing. Our results indicate that when organizational policies and procedures for whistleblowing are designed to incorporate the dimensions of fairness or justice, organizational accountants perceive a higher likelihood that financial statement fraud will be disclosed by a whistleblower. We found that higher levels of procedural justice, interactional justice, and distributive justice each significantly increase the perceived likelihood of whistleblowing. The results of the study are important because they suggest that management can take actions that may positively impact the likelihood that organizational accountants will report financial statement fraud (Miceli et al., 2009).

The results of this study indicate that fair policies and procedures may increase the likelihood of whistleblowing;

however, the establishment of formal mechanisms for reporting misconduct does not guarantee an environment that encourages whistleblowing. Corporate management may institute a whistleblower system that is consistent with regulatory requirements, while surreptitiously engag- ing in the blocking and ﬁltering of employee reports, sus- taining a norm of silence, and/or insinuating a threat of retribution (Dyck et al., 2007; Moberly, 2006). Further- more, the whistleblowing channel may have been implemented with the primary objective of mitigating corporate liability for wrongdoing, with little emphasis on encouraging employee reporting (Moberly, 2006).¹⁰To be effective in promoting whistleblowing, our results indicate that employees must perceive that the procedures in place are fair and reasonable, that management is supportive of whistleblowing, and that management will take appropriate action in resolving the alleged misconduct.

Whistleblowing laws and enforcement standards vary across countries (Lewis, 2008; Schmidt, 2005) and research has indicated that norms for whistleblowing and whistleblowing intentions can vary across cultures (Miceli et al., 2009; Park, Blenkinsopp, Oktem, & Omurgonulsen, 2008;

Patel, 2003; Schultz, Johnson, Morris, & Dyrnes, 1993).

While this research has focused on the design of structural mechanisms motivated by the statutory framework of Sar- banes-Oxley, it cannot be assumed that legislation infuses legitimacy and social acceptance to whistleblowing.

Rather, the prevailing cultural norms likely interact with the regulatory approach in determining the effectiveness of whistleblowing laws. Therefore, the results of this study may not generalize to organizational accountants outside the United States. Future research focusing upon the inter- play between cultural norms for whistleblowing and legislative policy can provide guidance for regulators in implementing the most promising course of action.

This research study makes important contributions to the literature and has implications for management intent on designing structural mechanisms that are effective in promoting whistleblowing. First, our results suggest that whistleblowing policies and procedures, as well as related supervisor exchanges with employees, that are consistent with the dimensions of organizational justice may positively impact the likelihood that organizational accountants will report potential incidents of ﬁnancial statement fraud. These results are similar to surveys of actual whistleblowers indicating that clear reporting channels, support from management, and the likelihood that management would address the practice were inﬂuential factors in the decision to blow the whistle (Callahan &

Dworkin, 1994; Dworkin, 2007; Mesmer-Magnus &

Viswevaran, 2005; Miceli & Near, 1984; Miceli et al., 2008). Second, we limited our sample to management accountants and internal auditors because these are the organizational accountants who are likely to have early knowledge of financial statement fraud, and minimizing the costs of financial statement fraud requires timely disclosure. Organizational accountants can effectively act as corporate fraud sentinels, and the results of this study contribute to our understanding of how accountants may be motivated to disclose fraud. Third, by framing our discussion under the rewards, anti-retaliation, and structural legislative models, we provide accounting researchers with a framework for guiding their thinking about whistleblowing. Future accounting research on whistleblowing should specify the specific legislative model under which hypotheses are advanced. For example, anonymous hotlines are important in encouraging whistleblowing under the Struc- tural Model (Kaplan et al., 2009), but may be irrelevant under the rewards model as employees are unlikely to retain anonymity if receiving a payment.

Acknowledgements

The authors would like to thank the members of the Institute of Management Accountants (IMA) and the Insti- tute of Internal Auditors (IIA) who participated in this study. We also appreciate the ﬁnancial support provided by the IMA. The authors gratefully acknowledge the help-

10 Several judicial holdings have maintained that if a corporation makes available sufﬁcient mechanisms to report misconduct, then liability exposure and monetary damages may be mitigated (Moberly, 2006).

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ful comments of the research workshop participants at the 2007 Annual Meeting of the American Accounting Associa- tion, and the 2007 Annual Meeting of the Accounting, Behavior, & Organizations section of the American Accounting Association. Finally, the authors appreciate the helpful comments of the two anonymous reviewers and the editor ofAccounting, Organizations & Society.

Appendix

Core scenario: the following paragraphs were common to all participants

Star Corporation has employed Alex Miller for the past 4 years as a senior accountant. Star is a publicly traded corporation that develops, licenses, and advertises an on- screen television guide technology. This technology allows consumers to navigate through and select television programs. The company generates revenue by licensing the technology to third parties and selling advertising that is displayed while consumers use the on-screen guide. The media industry is growing and the company is doing well ﬁnancially. Alex enjoys his job and has received above- average annual performance reviews. Alex reports to the Accounting Manager and the Accounting Manager reports to the CFO.

Alex’s job responsibilities include recording revenues earned from licensing contracts. In the ﬁrst quarter of the current ﬁscal year, Alex discovered an entry in the general ledger for $200,000 of sales revenue that he did not record.

Alex investigated the entry and found that it was input by the CFO. When Alex inquired as to the nature of the entry, the CFO responded that he recorded it for a contract that was in negotiation, and that the revenue was necessary to meet the earnings forecast for the quarter. The CFO also told Alex that the contract would be completed soon, and would subsequently be backdated to the date the revenue was recorded.

It is now the third quarter of the ﬁscal year and Alex has still not received the contract. Alex recently asked the CFO about the situation and was told that the contract negotiation had fallen through. The CFO said that he will reverse the revenue off the ledger in the fourth quarter, when sales are estimated to peak. Alex is very concerned about the misreporting of revenues on the company’s quarterly ﬁnancial statements. Alex is considering whether to report the actions of the CFO within the corporation.

Manipulations: Following the core scenario, for each of the three justice conditions participants received one of the following low/high manipulation paragraphs.

Low procedural justice condition High procedural justice condition Star Corporation’s policy encourages employees to report

ethical violations to the appropriate person in any of the following areas: direct management, higher-level management, accounting, internal audit, human resources, legal, security, or the board of directors.

Employees may also anonymously report wrongdoing by calling a toll free number to an ‘‘alert line.” The policy states that there are no recording devices associated with the ‘‘alert line.” Furthermore, the company prohibits retaliation against those reporting wrongdoing. Alex is aware of a situation, however, where a colleague recently reported a wrongdoing using the ‘‘alert line.” The colleague received a call back from the ‘‘alert line” to follow up on the report. An ‘‘alert line”

representative explained that, if necessary, phone numbers can be retrieved from their system. The colleague was very upset that her phone number was recorded

Star Corporation’s policy encourages employees to report ethical violations to the appropriate person in any of the following areas: direct management, higher-level management, accounting, internal audit, human resources, legal, security, or the board of directors. Employees may also anonymously report wrongdoing by calling a toll free number to an ‘‘alert line.” The policy states that there are no recording devices associated with the ‘‘alert line.”

Furthermore, the company prohibits retaliation against those who report wrongdoing. Alex is aware of a situation where a colleague recently reported a wrongdoing using the ‘‘alert line.” The colleague was satisﬁed that her anonymity was preserved

Low interactional justice condition High interactional justice condition Alex’s supervisor, the Accounting Manager, has covered

Star Corporation’s policy on reporting wrongdoing with Alex and other members of the department. Alex’s supervisor, however, has stated that he disagrees with the policy because it encourages employees to ‘‘spy” on each other. Alex is aware that his supervisor recently gave a low performance evaluation to an employee for

Alex’s supervisor, the Accounting Manager, has covered Star Corporation’s policy on reporting wrongdoing with Alex and other members of the department. Alex’s supervisor has been very supportive of the policy. In fact, Alex’s supervisor recently recommended an employee for Star Corporation’s citizenship award because the employee had discovered a theft of inventory and reported the

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Low distributive justice condition High distributive justice condition Star Corporation has had several recent instances of ethical

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