Whistle Blowing Divulging Organizational Fraud and Wrongdoing

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Abstract

Whistle blowing means informing the authorities regarding illegal or fraudulent activities by individuals or a group within the organization. There have been an increasing number of researches related to whistle blowing and the reason and antecedents behind it. The perception of wrongdoing, the responsibility, and judgement of the individual helps them to blow the whistle. Whistle blowing has the capability of stopping criminal activities. It is important to understand the concept of whistle blowing and the reason why employees report illegal activities. This essay discusses the reasons that research has shown are the reasons for whistle blowing so that organizational controls can use the models to help employees report fraud.

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Introduction

Whistle blowing is a concept that has singularly helped divulge organization fraud and wrongdoing. One of the eye-opening whistle blowing incidents was that of Enron, which brought forth the intentions of the organizational management and the society. This media attention to whistle blowing has led to academic interest in whistle blowing which has brought forth many research models to understand the antecedent and perception behind the phenomenon (Gundlach, Douglas, & Martinko, 2003). The concept of whistle blowing comes from the moral and ethical judgement of the individual. The perception of wrongdoing, the responsibility, and judgement of the individual helps them to blow the whistle and act against the organization for the betterment of the society.

Fraud and other unregulated activity lead to a great amount of unaccounted money and therefore are harmful to the society at large (Vadera, Aguilera, & Caza, 2009). Study shows US organizations loose five percent of their revenue to fraud (Vadera, Aguilera, & Caza, 2009). Such huge loss is indicative of the lack of monitoring and need for better monitoring from the company as well as from the stakeholders is necessary. It is believed that the most effective vehicles for reduction of fraudulent activity in the organization are the internal employees themselves (Vadera, Aguilera, & Caza, 2009). Research has suggested that “tips” from employees have been a helpful means of detecting fraud in organizations (Vadera, Aguilera, & Caza, 2009). However, another study suggests that only half of the US employees who watch misconduct go forward to protest against it overtly or covertly (Hudson Employment Index, 2005). Thus, non-reporting of fraudulent activities within organization may led to crime in modern society and hay the stakeholders of the organization. Thus, it is important to understand the concept of whistle blowing and the reason why employees report illegal activities. Further, the essay also discusses the reasons that research has shown for whistle blowing so that organizational controls can be used to help employees report fraud.

Whistle-Blowing

Due to the interdisciplinary nature of whistle blowing, a proper definition of the concept is essential. Whistle blowing is defined as “the disclosure by organization members (former or current) of illegal, immoral, or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action” (Near & Miceli, 1985a, p. 4). Whistle blowers are useful to the organization as well as the society as they help in curbing “fraudulent or wasteful practices” and thus, avoid harmful effect on stakeholders (Near & Micell, 1985b). However, the other side of whistle blowing is its effect on the organizations’ authority structure and so requires proper monitoring of organizations of whistle blowers (Near & Micell, 1985b).

The above definition of whistle blowing indicates that there are two main parties in whistle blowing – the whistle blower and the wrongdoer. The organization may or may not be aware of the wrongdoing and may or may not support it. However, if the organization denies any involvement when found to have supported the wrongdoer, then the organization too will be considered as the wrongdoer (Gundlach, Douglas, & Martinko, 2003). This definition of whistle blowing has been used in various studies such as that of nursing, internal audit, federal employees, managers, and in various industry related studies and is one of most widely used and accepted definition of whistle blowing (Near, Rehg, Scotter, & Miceli, 2004). This definition is mostly accepted due to its inclusive nature as both the whistle blowers who use internal channels, i.e. the organization, and external channel i.e. government or other outside organization. Further, it helps in “empirical determination of differences among types of whistle-blowers” (Near, Rehg, Scotter, & Miceli, 2004, p. 221).

Corporate world holds manifold examples of whistle blowing. Classic examples of corporate fraud are that of Enron or WorldCom and their exposure through whistle-blowers. Enron whistle blower Sherron Watkins first wrote a five-page memo of a probable accounting fraud to the management (Geller, 2004 ). In this case, Watkins did not blow the whistle to external agents, rather to the company management. Another case was Cynthia Cooper, the WorldCom whistle blower (Geller, 2004 ). She was the company’s internal auditor, which helped the company to discover its accounting frauds. In this case, too the whistle blower first exposed the fraud to the top management rather than to external sources.

There has been a lot of debate regarding the use of internal and external channel for whistle blowing. Ethical arguments pose that external channel cannot be considered as whistle blowing. Another critic of the use of external channel is that many government laws do not consider use of external channel as whistle blowing and so not provide protection in such cases. Thus, there has been a rising debate in organizational research that if whistle blowing through internal dissent could be considered (Near, Rehg, Scotter, & Miceli, 2004). However, it has been noted that most of the whistle blowers who use external channel have done it after trying internal channels and not receiving any satisfactory effect through them (Near, Rehg, Scotter, & Miceli, 2004). Thus, it may be stated that both external and internal channels are valid means for whistle blowing if the intention is to bring forth fraudulent activity. Therefore, whistle blowing is the practice of revealing fraudulent or illegal activity of the organization by an employee, using internal or external means to do so.

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Reason for Whistle Blowing

There has been various studies aimed at determining the reasons for whistle blowing (Near & Miceli, 1985a), the antecedent of the actual act of whistle blowing (Vadera, Aguilera, & Caza, 2009), the process of whistle blowing (Near, Rehg, Scotter, & Miceli, 2004), and whistle blowing from the “social information processing framework” (Gundlach, Douglas, & Martinko, 2003).

Justice theory based studies of whistle blowing tries to understand the whistle blowers’ behavior and the employees’ potential intention to act upon the wrongdoing (Gundlach, Douglas, & Martinko, 2003). Further, these theories have tried to understand the impetus of the whistle blower to act against the wrongdoing in term of their perceived reaction to wrongdoings. Thus, based on justice based argument of whistle blowing researchers have stated that injustice is the ingredient which motivate employees to act in such a manner to end the situation (Gundlach, Douglas, & Martinko, 2003). Thus, the perceived benefit of a whistle blowing increases the employees’ intention to expose the wrongdoing, in order to resolve the injustice.

Others have argued that whistle blowing is a form of “altruistic behavior” that is performed to promote social welfare (Near, Rehg, Scotter, & Miceli, 2004). That is the reason why many researchers have examined the relation between the whistle blowing and the individual’s pro social behavior like the individuals’ cognitive moral development and organizational commitment (Near & Micell, 1985b). Thus, these studies point out to two pertinent points – (1) the perceived seriousness of the wrongdoing (Near & Micell, 1985b), and (2) the whistle blower’s belief of cost and benefit of the action (Near, Rehg, Scotter, & Miceli, 2004).

Near and Miceli (1985a) has described whistle blowing in terms of motivational theories, with a hypothesis based on expectancy theory of motivation. Research has shown a positive relationship between the perceived seriousness of wrongdoing and likelihood of whistle blowing (Near & Micell, 1985b). Thus, they have stated, “we see some evidence of a “subjectively rational” decision process … whereby observers of wrongdoing weigh costs and benefits of taking action” (Near & Micell, 1985b, p. 542). Thus, it is suggested that another reason for the whistle blowing to occur is the employees’ perception of the organizational wrongdoing, and the cost-benefit analysis of the proposed action. Research that is more recent done by Gundlach et al. has proven this finding: “A major contribution of our model is that it shows how whistle-blowing decisions can be affected by individuals’ causal analyses of perceived wrongdoing, as well as their perceptions of the consequences of acting.” (2003, p. 116)

Attribution theory has been used to show how causal effect on the employee of the perceived wrongdoing may influence her decision to respond to the incident. This theory concerns the individual’s perception of the cause of the event. Thus, how an individual perceives the wrongdoing may have occurred will influence the course of her decision further. Thus, it is stated by supporters of this theory “argue that individuals vary in their behavioral, psychological, and emotional responses to events, to the extent they differ in their assessments of the causal mechanisms underlying them” (Gundlach, Douglas, & Martinko, 2003, p. 109). This theory, therefore, points out that the perception of the individuals of the attributional perspective of the wrongdoing is an initiator for whistle blowing.

Research shows that people who blow the whistle have characteristically different from those who do not blow the whistle. Thus, various models of antecedents had been developed in order to identify the process of wrongdoing. This aimed at understanding how whistle blowers react or go about the process. This has shown a distinct divide in the process of whistle blowing in case of difference in wrongdoing (Near, Rehg, Scotter, & Miceli, 2004). For instance, whistle blowers may use a different model of whistle blowing for say sexual harassment case than for a financial fraud case. Thus, power, justice, and emotion dominate the literature on reason for the whistle blowing (Gundlach, Douglas, & Martinko, 2003).

How to Encourage Whistle Blowing

Research on whistle blowing has tried to identify the reason for whistle blowing and the way they can be encouraged as they are helpful to all stakeholders of the organization. The main aim in this case for managers is to promote internal, rather than external whistle blowing, as this would reduce a lot of legal hassle and anti-publicity for the company. Gundlach, Douglas, & Martinko (2003) have supports the justice literature of reason for whistle blowing which suggests that the perception of organizational justice if inculcated within the organization will be helpful in prompting internal rather than external whistle blowing. They have provided examples for managers to follow in order to increase perception of organizational justice:

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For example, access to ethical hotlines, ombudsmen, mediators, and peer review panels could encourage potential whistle-blowers to blow the whistle internally, since these mechanisms might reduce their expectancies for wrongdoer retaliation and, thus, reduce the perceived costs of blowing the whistle. Furthermore, these internal mechanisms enable potential whistle-blowers to act on their assignments of responsibility and emotions while simultaneously reserving the integrity, and perhaps the survival, of their organizations.” (Gundlach, Douglas, & Martinko, 2003, p. 116)

Research has also suggested the influence of national culture on whistle blowing (Vadera, Aguilera, & Caza, 2009). This research also suggests that an amalgamation of macro and micro level of reasons that prompt whistle blowing behavior. Thus, this research has suggested that organizations must identify the identity, organizational hierarchies, and connection between multiple identities may help in promoting and understanding whistle blowing behavior of individuals.

Research has identified that the fear of retaliation is one of the potent reason for whistle blowers from not taking action against illegal activity. However, research has also shown that increased retaliation has also led to increased whistle blowing in organizations (Near, Rehg, Scotter, & Miceli, 2004). Near et al. (2004) conducted a study on inactive whistle blowers who said that they “did not report wrongdoing was that they thought nothing could be done to remedy the situation; fear of the risk associated with reporting was a less potent reason for not reporting wrongdoing” (238). The study further shows that whistle blowing intention is not contingent to experience of the employee with the organization. Observable difference has been found on the nature of organization and type of wrongdoing. Thus, this study also suggests that organizational justice if inculcated within the organization could encourage the whistle blowing (Near, Rehg, Scotter, & Miceli, 2004).

Legal methods to increase whistle blowing has been widely ineffective (Near, Dworkin, & Miceli, 1993). Encouraging procedural justice shows that the legal attempts to decrease retaliation and thus increase satisfaction of whistle blowers. A more convincing motivator would be “to improve the system satisfaction of both the whistleblower and other organization members who observe the whistle-blowing activity, by trying to create mechanisms that would increase the perceived level of procedural justice.” (Near, Dworkin, & Miceli, 1993, p. 406) The present legal system aims at punishing those who retaliate against whistle blowers; however, research shows the fear of retaliation does not discourage whistle blowers. Thus other means of encouragement like “entities responsive to whistle-blowing, and discouraging organizations from retaliation (as opposed to offering whistle-blowers remedies after retaliation has occurred)” (1993, p. 407) could be more effective means of increasing whistle blowing. Encouraging distributive justice could be a more effective incentive to increase satisfaction of whistle blower outcome like rewarding whistle blowers.

Conclusion

Whistle blowing is an act that individuals undertake when they perceive that illegal activates must be reported to authorities. This may be done to internal or external members or groups. There has been varied research into the reason why individuals undertake a whistle blowing behavior and others do not. Apparent understanding suggests that the feeling of justice and the perception of the wrongdoing makes people report illegal activity. However, research shows that is based on the cost-benefit analysis of the individuals and the perception of outcome of whistle blowing. Thus, if the individuals believe that by blowing the whistle the stakeholder’s welfare will be benefitted, then she will undertake the action. Further, there are differences in the nature of whistle blowing depending on the type of wrongdoing and the type of organization. However, whistle blowing may cause problems to the organizational authority system. Even then, organizations today aim at encouraging whistle blowing, and that is there are legal methods that safeguard the interests of whistle blowers from possible organizational retaliations. Nevertheless, research has shown that due to the perception of procedural and distributive justice that employees may be encouraged to become whistle blowers rather than legal immunity.

References

Geller, A. (2004). Whistleblower complaints are up, but why? Web.

Gundlach, M. J., Douglas, S. C., & Martinko, M. J. (2003). The Decision to Blow the Whistle: A Social Information Processing Framework. Academy ol Management Review Vol. 28 No. 1 , 107-123.

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Hudson Employment Index. (2005). One in three workers witness ethical misconduct despite clearly communicated guidelines. Washington, DC: Hudson.

Near, J. P., & Miceli, M. P. (1985a). Organizational dissidence: The case of whistle-blowing. Journal of Business Ethics Vol. 4 , 1-16.

Near, J. P., & Micell, M. P. (1985b). Characteristics of Organizational Climate and Perceived Wrongdoing Associated with Whistle-Blowing Decisions. Personnel Psychology , 525-544.

Near, J. P., Dworkin, T. M., & Miceli, M. P. (1993). Explaining The Whistleblowing Process: Suggestions From Power Theory And Justice Theory. Organization Science Vol. 4 No. 3 , 393-411.

Near, J. P., Rehg, M. T., Scotter, J. R., & Miceli, M. P. (2004). Does Type of Wrongdoing Affect the Whistleblowing Process?. Business Ethics Quarterly Vol. 14 No. 2 , 219-242.

Vadera, A. K., Aguilera, R. V., & Caza, B. B. (2009). Making Sense of Whistle-Blowing’s Antecedents: Learning from Research on Identity and Ethics Programs. Business Ethics Quarterly 19(4) , 553-586.

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BusinessEssay. (2021) 'Whistle Blowing Divulging Organizational Fraud and Wrongdoing'. 31 December.

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BusinessEssay. 2021. "Whistle Blowing Divulging Organizational Fraud and Wrongdoing." December 31, 2021. https://business-essay.com/whistle-blowing-divulging-organizational-fraud-and-wrongdoing/.

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