While it is clear that the government expects companies to have an internal reporting system, there are benefits far beyond putting you in the government’s good graces. Companies with a more robust internal reporting system generated more reports. Dr. Welch found a group of companies he termed “power users”, which were high-level users of whistleblower reporting systems who had more activity than the average entity. These “power user” companies have several interesting characteristics. First, they are typically firms with higher quality earnings reporting. They are more profitable entities. Finally, these “power user” companies were firms with higher quality governance, as rated by the Entrenchment Index, which is used to measure how entrenched management is in a company.
Conversely, companies which were observed to be a more limited user of whistleblower reporting systems are companies that were seen to have poor governance. They are more prone to financial accounting issues, such as discretionary accruals, which could prove problematic. These tend to be smaller and less mature firms. Their overall compliance programs were generally not seen as robust or as effective as those in larger, more mature organizations. Finally, these firms, probably because they were smaller and less mature, are more prone to extreme growth and the problems associated with trying to scale up quickly.
All of this points to one unmistakable conclusion, a robust whistleblower reporting system facilitates a company’s resolution of problems before they become major problems or legal violations bringing the Securities and Exchange Commission (SEC) or DOJ calling.
Three Key Takeaways
- Companies with a robust whistleblower and reporting system had greater profitability and workforce productivity as measured by Return on Assets.
- There were fewer material lawsuits brought against the company overall and there were lower settlement costs if a lawsuit did occur.
- There were fewer external whistleblower reports to regulatory agencies and other authorities.
