Over this special five-part podcast series, I have visited with Dr. Kyle Welch, Assistant Professor at George Washington University (GWU), on his recently released paper, co-authored with Stephen Stubben, Associate Professor from The University of Utah, entitled “Evidence on the Use and Efficacy of Internal Whistleblowing Systems” (Report). In this paper, Welch and Stubben reviewed some 15 years of anonymized data from NAVEX Global, Inc., the sponsor of this podcast series. This data was from the company’s hotline reporting systems. Some of the key findings included that companies with a robust whistleblower and reporting system had greater profitability and workforce productivity as measured by Return on Assets (ROA) and there were fewer material lawsuits brought against the company overall and there were lower settlement costs if a lawsuit did occur. Finally, there were fewer external whistleblower reports to regulatory agencies and other authorities. This podcast series has taken a deep dive into the Report. Today, we bring it all by considering what it means for compliance practitioners.

Clearly the Report demonstrates the power of a robust whistleblower reporting system. Once again this is not simply having a hotline but an entire internal reporting system with engagement throughout an organization. This means someone is there to answer the phone; pass the message along and triage the issue. Someone is there to do an investigation, remediate if appropriate, but also communicate with the internal reporter. Most importantly, all in a very fair process manner that the employee or internal reporter will trust.

Dr. Welch added, “The interesting thing is there are two parts to it I do not believe they can be separated. The first is the raw number of reports and then the second thing is engagement with the report.” This is why it is called a whistleblower reporting system and it means you should consider the aspect of engagement with the system by management and how much they value these reports. He stated, “it turns out the relationship is a very strong relationship between the two. And so what that translates into is that usually organizations that have figured this out are hitting on this on multiple levels. There are organizations where employees feel like they can come forward and make an internal report, because they feel safe in doing so and they plan on staying at the organization.”

Obviously Chief Compliance Officers (CCOs) can use this type of information to demonstrate the efficacy of an internal whistleblower reporting system going forward. It also provides the CCO actionable information to prevent, detect and remediate issues before they become full blown legal violations. Conversely, the lack of information can lead to compliance related inquiries.

Dr. Welch then turned to the Board of Directors. He sees two big impacts from this study, directly applicable to the Board of Directors. First, “a more active engagement and more reporting is a good thing for the signal its sends to senior management about corporate culture. The second thing is the direct, unfiltered information that it can provide to Boards of Directors. One of the key corporate governance failures over a wide casting of recent corporate scandals has been the withholding of information to Boards by senior management. Just think about how this could have changed the calculus at Wells Fargo if its Board of Directors had been made aware of the whistleblower reports of fraudulently created accounts up to five years before the scandal broke publicly and the Board finally got the full picture. Remember the Volkswagen Board who found about the emissions-testing scandal when reading about the company’s admissions in the newspaper. Now the Board can have an internal report, with direct information.”

Finally, a robust whistleblower reporting system speaks to a functioning and ethical corporate culture. Employees who can report issues, in a fair manner, without fear of retaliation are more empowered to make the company run more efficiently and more profitably. As Dr. Welch said earlier in this series, one of the reasons employees report internally is they want to stay at the company. Such a culture also attracts more employees, not an inconsequential consideration in this age of the Gig Economy.

Lastly, and from his accounting perspective, Dr. Welch added another reason, that being accruals in financial statements. The more accruals there are going forward, the greater chance there is for financial statement manipulation or fraud. One of his key findings was that companies that did not have at least average whistleblower reporting systems were more likely to have such issues. It may be due to the firms maturity or simply a commitment to do things the right way but if a company does not have a robust whistleblower reporting system, there is such a correlation.

The bottom line of the Report is that it is most welcome news for every compliance practitioner out there. You should study the Report and see if your organization qualifies as a “power user” as defined by Dr. Welch and if it does not, how can you move it towards doing so. Finally, the next time anyone on your Executive Leadership Team (ELT), senior management or Board of Directors asks you about costs, point to this Report as evidence of cost savings through compliance.

 

The sponsor of this special five-part podcast series is NAVEX Global, Inc.

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