Study Reveals the Impact of Whistle Blowers

Enforcement actions initiated by whistleblowers tend to be more costly than others, according to a recent study. Researchers also found that the complaints of whistle blowers have influenced the severity of financial penalties, length of prison sentences, and duration of the actions.

The study examined the effect of employee whistleblowers on the consequences of financial misrepresentation enforcement actions brought by the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) between 1978 and 2012. The data revealed that of the 1,133 firms subject to financial misrepresentation enforcement actions between 1978 and 2012, 145 are associated with at least one whistleblower complaint. To isolate the impact of whistleblowers, researchers controlled for a number of other variables, such as the number of executives involved.

“Even after holding all those things constant, we see that whistleblowers have a very big effect,” said Nate Sharp, an associate professor at Texas A&M University and one of the co-authors of the paper.

Below are several specific findings of note:

• The involvement of a whistleblower increased the likelihood of an enforcement action.
• Whistleblower involvement is associated with $90.16 to $92.88 million greater firm penalties than if no whistleblower was involved.
• Fines assessed against executives and other employees averaged $50.22 to $56.50 million more than if no whistleblower was involved.
• When whistleblowers are associated with an enforcement action, executives and employees at targeted firms are sentenced to prison on average 21.86 to 27.02 months longer than if no whistleblower was involved.
• Cases involving a whistleblower continued for about 10 months (10.7%) longer than actions in which no whistleblower was involved.
• The odds of a firm facing an enforcement action are 5.76 times greater among firms with prior whistleblower complaints.

As we have previously discussed on the Scarinci Hollenbeck business blog, whistleblower claims have also increased in recent years, in large part due to government programs that provide financial awards to whistleblowers who provide original information that leads to a successful enforcement action resulting in monetary sanctions. For instance, the SEC recently announced that it awarded $35 million to nine tipsters in FY 2014.

To help ensure that you are not on the receiving end of costly and time consuming enforcement action, it is imperative to have effective internal policies and procedures that encourage employees to address their concerns in-house rather than reporting them directly to the federal government.