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An Examination of Financial Sub-certification and Timing of Fraud Discovery on Employee Whistleblowing Reporting Intentions

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Abstract

The Sarbanes–Oxley Act of 2002 (SOX) requires company executives to certify financial statements and internal controls as a means of reducing fraud. Many companies have operationalized this by instituting a sub-certification process and requiring lower-level managers to sign certification statements. These lower-level organizational members are often the individuals who are aware of fraud and are in the best position to provide information on the fraudulent act. However, the sub-certification process may have the effect of reducing employees’ intentions to report wrongdoing. We suggest that subordinates with knowledge of a superior who committed a fraudulent act and certified that there is no fraud will feel less personal responsibility to report the act, thus, decreasing reporting intentions. Additionally, we suggest that if the fraud is discovered subsequent to the reports being filed with the Securities and Exchange Commission (SEC), employees will perceive lower management responsiveness to investigate the fraud, which will reduce intentions to report. Using an experimental approach, we manipulate two between-participant variables: (1) the presence or absence of sub-certification by the transgressor and (2) the timing of fraud discovery, either before or after the reports have been filed with the SEC. We find that when sub-certification is present, perceived personal responsibility and intentions to report were diminished compared to when sub-certification is absent. Timing of the discovery of the fraudulent act did not influence perceived management responsiveness or reporting intentions. Supplemental analysis shows that personal responsibility partially mediates the relationship between sub-certification and reporting intentions. Our findings suggest that audit committees and senior executives may want to carefully consider the costs and benefits of the sub-certification process.

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Notes

  1. It is important to note that the results of our study regarding whistleblowing behavior are generalizable to those subordinates who become aware of fraud and are familiar with the financial reporting process of their organization including the certification (or sub-certification) process.

  2. The next most popular detection method is management review at about 15 % (ACFE 2012).

  3. These two factors were also included in the study by Keil et al. (2010) as specific factors in their research model.

  4. An individual providing a false Section 302 certification report could potentially be subject to both SEC civil action and private stockholder action for violating federal securities laws (Geiger and Taylor 2003; SEC 2002).

  5. Several recent studies (Ayers and Kaplan 2005; Chiu 2003; Kaplan and Schultz 2007; Kaplan et al. 2011) have also used MBA students to examine reporting intentions for questionable acts.

  6. A false billing scheme was selected because it represents one of the most frequent schemes for manufacturing companies to misappropriate assets and because it often involves substantial amounts of cash (ACFE 2012).

  7. For more information on shell companies, see Wells (2008, pp. 97–104).

  8. Read and Rama (2003) found that 69 % of chief internal auditors included in their survey received reports of wrongdoing or questionable acts. About 40 % these reports related to fraud.

  9. SOX (2002) requires companies to provide anonymous whistleblowing channels for their employees. Since the issuance of SOX, researchers have often provided multiple channels to their participants as a means of increasing external validity (see Kaplan and Schultz 2007; Kaplan et al. 2009, 2011; Robertson 2010; Robertson et al. 2011). We likewise follow this procedure.

  10. Participants responding incorrectly to the two manipulation check items were dropped because of a lack of “inclusion importance” (Yates 1990, p. 376). In this regard, Tan and Yates (1995, p. 315) contend that “if a decision maker never even acknowledges the existence of a particular dimension, the decision maker cannot possibly respond to that dimension.” Further, the two participants who did not respond to the manipulation check questions were not dropped as we do not know if they paid attention to the manipulation. Thus, to be conservative, we retained these two observations. It is important to note that the results are very similar when we exclude these two participants from our analyses.

  11. The analysis used the general linear models package of SAS which adjusts for unequal cell sizes.

  12. Similar results were obtained using the internal audit and anonymous hotline intentions measures individually.

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Acknowledgments

The authors wish to acknowledge helpful comments from Steve Kaplan. We would also like to thank DePaul University for their assistance in obtaining research participants.

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Authors and Affiliations

  1. W. P. Carey School of Business, Arizona State University, Tempe, AZ, 85287-3606, USA

    D. Jordan Lowe

  2. College of Commerce, DePaul University, Chicago, IL, 60604-2287, USA

    Kelly R. Pope

  3. Thunderbird School of Global Management, Glendale, AZ, 85306-6000, USA

    Janet A. Samuels

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  1. D. Jordan Lowe
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Correspondence to D. Jordan Lowe.

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Lowe, D.J., Pope, K.R. & Samuels, J.A. An Examination of Financial Sub-certification and Timing of Fraud Discovery on Employee Whistleblowing Reporting Intentions. J Bus Ethics 131, 757–772 (2015). https://doi.org/10.1007/s10551-013-2020-8

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