Do whistleblower protection laws prevent accounting fraud?
When it comes to reporting fraudulent activity, do you know what to do if you suspect fraud in your organization? Would you blow the whistle?
According to a recent study conducted by CUNY-Baruch College’s Heemin Lee, companies that have been exposed to whistleblower laws are less likely to experience accounting fraud.
In her research, Lee examined two sets of companies.
The first group was comprised of organizations that are subject to state-level False Claims Act (FCA) rules. The False Claims Act has one of the strongest whistleblower protection provisions in the United States, and allows individuals and entities with evidence of fraud against federal programs to sue the wrongdoer on behalf of the US Government. In this case, the whistleblower has the potential for a significant financial recovery if the information is helpful in the lawsuit.
The other group was comprised of companies that are subject to the Securities and Exchange Commission (SEC) whistleblower program, which is part of the Dodd-Frank Act implemented in 2011. In this instance, individuals may provide tips directly to the SEC while receiving protection from potential retaliation of an employer or company. The whistleblower is also entitled to financial rewards if the information leads to a successful legal action.
Lee’s research claims that “exposure to the threat of whistleblowing under state FCAs reduces a company’s probability of accounting fraud by 7%.” Her data also claims that the SEC whistleblower program has similarly reduced the likelihood of fraudulent acts by roughly 7%.
In addition to understanding whistleblower protection laws, having strong internal controls can be a significant deterrent of fraud. Internal controls, coupled with a policy for fraud prevention, detection, and response is one of the key elements for protecting your organization from fraud.
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For advice on how to handle a potential whistleblower situation read our blog post here. Or click here for some helpful hints on deciding whether or not to blow the whistle.