Study: Blowing the whistle won’t harm the bottom line

A recent study out of George Washington University, called Evidence on the Use and Efficacy of Internal Whistleblowing Systems and based on data supplied by compliance software provider NAVEX Global, examines the relationship between internal reporting system usage (whistleblower hotlines) and business performance.

Researchers were given anonymised access to more than three million internal report records from approximately 5,000 public companies—including more than half of the Fortune 500. The data examined includes hotline reports over a 14-year period between 2004 and 2017.

The report found a “clear correlation” between increased use of internal hotline reporting systems and improved business performance across several important dimensions. For example, the research shows higher levels of hotline use results in a better return on assets (ROA)—some 2.8 percent more than those organisations with lower usage.

On average, companies with higher levels of reporting also experienced 6.9 percent fewer pending material lawsuits in the subsequent three years than those with lower levels of activity. Companies that had more management attention to reports (for example, compliance program administrators viewing the file more often, or evidence of gathering more information) had even fewer lawsuits.

This is because high internal reporting activity allows companies to resolve problems before they reach the point of a lawsuit. And when lawsuits were brought against companies, those with higher hotline usage faced 20.4 percent less in total settlement amounts over a subsequent three-year period.

Another bonus was companies with more internal reporting activity experienced fewer external reports to watchdogs such as the Occupational Health & Safety Administration (which receives whistleblower reports under Section 806 of the Sarbanes-Oxley Act) in subsequent years.

The research also found lower levels of hotline activity were associated with suspect corporate governance and financial reporting. For example, it found firms with lower-level hotline activity also tend to claim “discretionary accruals” more often.

These are judgments and estimates a company’s management makes about cash flows and, while these decisions are not bound by specific accounting rules, research has found greater use of discretionary accruals can be associated with earnings manipulation. Indeed, the report points out companies with more discretionary accruals have also tended to see more external whistleblower reports in subsequent years.

There are other, “softer” advantages to having better internal reporting processes, says the report. For example, increased hotline activity tells a company how eager its employees are to raise and discuss problems to ensure the long-term success of the company, both financially and strategically. It also provides a useful indicator of corporate culture, particularly around compliance: If hotline activity measures employees’ willingness to raise and discuss problems, then tracking that reporting activity as a metric itself—month after month, quarter after quarter—reveals how much more or less willing employees are to raise and discuss problems over time.

“On those grounds alone, boards should be demanding this data—and compliance officers should be glad to provide it,” says a summary of the research by NAVEX Global, called Strength in Numbers: The ROI of Compliance Program Hotline Reporting. “It’s a crucial metric of business performance across several definitions of the term: higher return on assets, lower levels of litigation, smaller legal settlements.”

“Fundamentally, compliance officers now have the first empirical evidence of something that has always felt right: that investing in compliance brings a strategic advantage to the organisation,” it adds.