When it comes to handling the claims of whistleblowers, companies would do well to audit their audit committees.
A new study found that directors who field whistleblowing claims are likely to discount charges that could threaten their board seats and will assign fewer resources into investigating such claims.
In weighing hypothetical charges, 83 veteran directors at large U.S. corporations said they would allocate 42% fewer resources on average to fraud tips that might ultimately cost them their board seats.
The results make some sense, but James Hunton, the Bentley College professor who coauthored the report, said that he was surprised, given the caliber of the subjects. Hunton believes that the directors subconsciously put their personal reputations above their professional duties; or as he put it in the paper, they exercised "motivational skepticism."
"We know that these are honest individuals of high integrity; that's not the issue here," he said. "The issue here is that we're all vulnerable to these pressures."
The study also found that audit committee members were less likely to believe and act on anonymous whistleblowing charges, versus those coming from named sources.
The subjects allocated 38% less hypothetical money to look into complaints from secretive employees. This result is no doubt a reaction to the piles of false charges anonymously lobbed by upset workers.
Sarbanes-Oxley required companies to offer whistle-blowers an anonymous forum and for good reason; the danger of going on the record is great. A 2007 study by the National Bureau of Economic Research found that 80% of whisteblowers either lost their jobs, quit under duress or lost significant responsibilities after making their charges public.
However, Hunton's research shows that directors may be letting some legitimate fraud claims slip into obscurity simply because they come from anonymous sources.
All of this begs the question, do shareholders need yet another layer of impartial oversight to screen claims from whistleblowers? Hunton doesn't think it's a bad idea. He suggested a lawyer who doesn't do any other work for the firm, or the SEC.
Mary Schapiro, auditor at-large?
Write to Kyle Stock