Whistle-Blowers by the Numbers

Print Share on LinkedIn More

The nonprofit sector does not record statistics on many accountability indicators, but it should. One vital statistic to track would be the treatment of whistle-blowers and the disposition of their complaints. Without this information, we have to imagine the fate of nonprofit whistle-blowers extrapolated from weak government and corporate data.

First, how important are whistle-blowers to accountability? According to a 2007 National Bureau of Economic Research (NBER) paper, between 1996 and 2004 employee whistle-blowers were responsible for revealing fraud in 19 percent of cases of corporate fraud involving companies with more than $750 million in assets. [1 ] Basically, employee whistle-blowers uncovered one out of every five cases of corporate fraud.

The corporate sector’s official regulators (such as the Securities and Exchange Commission) and theoretical self-regulating actors (stock exchange regulators, underwriters, and commercial banks) were practically invisible as fraud spotters. [ 2 ]

According to the Association of Certified Fraud Examiners, in 2006, whistle-blowers were even more significant, accounting for “34% of the detection of all fraudulent activity . . . 34% of the detection of fraudulent activity for not-for-profit organizations . . . and 40% of the detection of fraudulent activity for government agencies.”[ 3 ]

What happened to these intrepid souls who stood up for investors, taxpayers, and the public as whistle-blowers? According to NBER’s report, “In 45 % of the cases, the employee blowing the whistle does not identify him or herself individually and in 82% of cases with named employees, the individual alleges that they were fired, quit under duress, or had significantly altered responsibilities as a result of bringing the fraud to light [emphasis added].” [ 4 ] Contrary to the spirit of Sarbanes-Oxley, the overwhelming result has been that whistle-blowers find themselves disadvantaged, abused, and penalized for having spoken up.

In the government arena, the whistle-blower picture doesn’t look much better. According to an Associated Press review, for example, employees who blew the whistle on fraud by U.S. companies doing contract work in war-ravaged Iraq “have been fired or demoted, shunned by colleagues, and denied government support in whistle-blower lawsuits filed against contracting firms.”[ 5 ]

While they face ostracism, work-related penalties, and even termination, potential whistle-blowers might come forward if they believed that the system were likely to respond as a result of their actions. At the government level, there is little evidence that whistle-blowers can reasonably expect their risk to result in corrective action. Under the federal Whistle-blower Protection Act, the Office of Special Counsel (OSC) is charged with protecting federal government whistle-blowers, but its 2006 annual report counted 2,582 new whistle-blower disclosures between the 2002 fiscal year and the 2006 fiscal year; only 100 were referred to agency directors for investigation and only 41 to agency inspectors general for action.[ 6 ] Why would employees risk it all to blow the whistle when it is probable that nothing good will happen personally or organizationally?

It might be daunting for federal government whistle-blowers to look to the OSC for support against agency retaliations when the agency’s OSC director has been fighting his own staff who blew the whistle on his inadequate antidiscrimination practices and his proclivity to cronyism. The OSC director and George W. Bush appointee responded by condemning whistle-blowers who spoke to the press and allegedly initiating his own retaliation against complainants in his agency.[ 7 ]

Protection isn’t much better under Sarbanes-Oxley, which ostensibly contains provisions to protect whistle-blowers.[ 8 ] According to one study, of 677 Sarbanes-Oxley whistle-blower complaints regarding employer retaliation through May of 2006, 499 were dismissed and 95 were withdrawn. Only 2 percent of cases that eventually made it to an administrative law judge hearing resulted in decisions in favor of employee whistle-blowers.[ 9 ] Not surprisingly, NBER’s report indicates that the percentage of corporate fraud cases revealed by employee whistle-blowers has actually dropped since the enactment of Sarbanes-Oxley.[ 10 ]

The action of blowing the whistle on a government, corporate, or nonprofit entity does not mean that the whistle-blower is right. But limited definitions of what constitutes protected whistle-blowing and the power imbalance between individual whistle-blowers and their institutional opponents add up to real-life deterrents for people who want to report what they believe is wrongdoing.

1. Alexander Dyck, Adair Morse, and Luigi Zingales, “Who Blows the Whistle on Corporate Fraud?,” National Bureau of Economic Research, February 2007, pp. 1–2.
2. As testament to the importance of muscular external regulation, financial analysts and auditors were each credited with uncovering approximately 14 percent of the cases and the Securities and Exchange Commission about 6 percent, all substantially more than the zeroes attributable to corporate self-regulators.
3. Cited in Michael D. Akers and Tim V. Eaton, “Whistleblowing and Good Governance,” the CPA Journal, June 2007.
4.  Dyck et al., p. 3
5.  Deborah Hastings, “Those Who Blow Whistle on Contractor Fraud in Iraq Face Penalties,” Associated Press Financial Wire, August 24, 2007.
6. http://www.osc.gov/documents/reports/ar-2006.pdf, p. 31
7. See, for example, the testimony of Beth Daley from the Project on Governmental Oversight at a hearing of the Committee on House Oversight and Government Reform Subcommittee on Federal Workforce, Postal Service, and the District of Columbia, “Ensuring a Merit-Based Employment System,” CQ Congressional Testimony, July 12, 2007.
8. Section 806 of Sarbanes-Oxley prescribes a procedure for aggrieved whistle-blowers to file complaints and get a hearing with U.S. Department of Labor administrative law judges.
9. Cited in Terry Morehead Dworkin, “SOX and Whistleblowing; Sarbanes-Oxley Act of 2002,” Michigan Law Review, June 1, 2007.
10. Dyck et al., p. 6.