Monetary awards for fraud whistleblowers may seem like a no-brainer, but a new study has found that offering cash for fraud detection may actually negatively effect individual's motivations.
“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,” stated James Wainberg, assistant professor of accounting at Florida Atlantic University’s College of Business and one of the study's authors. “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 co-authored the study, recently published in Auditing: A Journal of Practice & Theory, with Leslie Berger, assistant professor of accounting at Wilfrid Laurier University, and Stephen Perreault, associate professor at Providence College School of Business.
More and more businesses and regulatory agencies are either currently offering or mulling the option offering monetary rewards for the reporting of unscrupulous behavior, but with a catch -- a minimum amount of fraud. The Securities and Exchange Commission, for instance, will offer rewards only if a minimum of $1 million is recovered.
The study's researchers found this type of parameter of fraud reporting would boost the chances that not all fraud will be reported. In an experiment conducted by the researchers, complete with auditors and accounting professionals as test subjects, it was found that fraud was less likely to be reported when a monetary incentive was available, but the amount of fraud committed was less than a given threshold.
“What’s going on is this hijacking of the moral decision frame by the financial incentives,” Wainberg added. “Once that happens, whether or not to report the fraud will largely become a function of an individual’s perceptions of reward adequacy in light of the perceived risk of reporting. So that’s a caution to regulators, compliance professionals and others in corporate governance who are interested in understanding the strengths and weaknesses of offering financial incentives to whistleblowers."
Fraud minimums were also found to significantly delay reporting until the problem was too big to ignore, in turn minimizing the chances of exposing deceit in the early going.
"The question we need to ask is do we really want to incentivize whistleblowers to delay reporting frauds in order to maximize their rewards?" Wainberg concluded.
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