Auditing the Act of Whistle

Auditing

The act of whistle blowing when fraudulent activity is detected may not be as simple as it appears. The right thing to do would be to confront the person suspected of committing the fraud, but sometimes this is not always the easiest thing to do. So many different factors come into play with confrontation, especially if the fraudulent act is being committed by a supervisor. Sometimes, a confrontation serves as a warning and is all that is needed to get things back on track. At other times, the confrontation is unsuccessful and the person is left to figure out what to do next.

There is always the possibility of retaliation if a confrontation occurs, especially in the case of an unsuccessful confrontation. Once this happens, it has the potential to discourage any one else from confronting a person whom they feel is committing a fraudulent act. The research contained in this article seeks to find out what happens with an actual confrontation. The assumption is that when the confrontation is unsuccessful, the individual will report the fraud to their supervisor's supervisor before reporting the transgression to an internal auditor. There could be many factors that lead to this hypothesis.

The person doing the confronting should understand that the actual act of confrontation will mean that all anonymity is lost. Even if this person has the backing of the supervisor's supervisor, there may still be some type of repercussions from other employees. Whistle blowing is not an easy decision to make and that is why it is up to each individual company to implement several different methods of reporting any type of fraud. The person reporting the fraud should never be put into a position of feeling uncomfortable or unsafe. This study will help executives to make an informed decision on whether or not they will implement confrontation at their institutions of employment

Auditing

In the aftermath scandals such as the Enron and Tyco ones, whistle blowing has become a term that most are now familiar with and hear on a constant basis. To some, whistle blowing may be seen more as an act of snitching, but it has become necessary when fraud is suspected or detected because one person's indiscretions could mean the loss of jobs for an entire company. In the journal article titled, The Effect of Social Confrontation on Individuals' Intentions to Internally Report Fraud gives the reader valuable information on the effects of confronting and reporting such wrong doings.

The authors start out by discussing how company fraud affects a number of individuals. If fraud is caught early on, it can have far less damaging consequences on the company as a whole. It is usually a coworker who is not involved in the fraud the one that detects it (p. 52). Many times this person is not even looking for any type of fraud, but stumbles upon his finding purely by accident. This is an uncomfortable position for anyone to be placed in because not confronting the individual who is committing the fraud or failing to report their suspicions could mean more trouble down the road for the entire company.

The purpose of this article was to find out the results of an unsuccessful confrontation with a person's manager suspected of fraud and to find out if there is more likelihood that the fraud will be reported to their supervisor's supervisor or to an internal auditor. The two types of fraud studied in the research are misappropriation of assets and fraudulent financial reporting. Those who partook in the study were evening ninety-six (96) M.B.A. students who received the background information on a company and given a scenario that dealt with the discovery, confrontation and reporting of the fraud.

The hypothesis of this research is that when fraud is discovered and confronted unsuccessfully, the individual will be inclined to report the fraud to their supervisor's supervisor as opposed to an internal auditor. However, if any type of confrontation does not happen after fraud is discovered the individual is more inclined to report the transgression to an internal auditor. A 2 x 2 design was used for the experiment (p. 56).

The participants were divided into two groups. The first group consisted of forty-four students and the second group consisted of fifty-two students. The first group was assigned to a situation where the social confrontation what the present condition and the second group dealt with a scenario pertaining to the social confrontation absent condition. The present or absent social confrontation had to do with whether or not the person would confront the wrong doer before either telling the supervisor or the internal auditor. There were two types of fraudulent acts. One was fraudulent financial reporting and the other was misappropriation of assets. Of the ninety-six participants, eighteen answered incorrectly with left the remaining number of participants at seventy-seven (p. 59-60).

The experiment revealed that people are more inclined to confront the person committing the fraudulent act before talking to their supervisor's supervisor. This may be because they want to give the person a chance to correct the bad behavior before it gets out of hand and causes severe damage. But, the study also revealed that if the person committing the fraud is confronted and the result is unsuccessful that the person doing the confronting would more than likely report the act to the supervisor. This was found to be true for both types of fraudulent acts.

The experiment also suggests that if the confrontation is unsuccessful, there is a strong possibility that the confronter will suffer some type of retaliation if nothing is done. This may be the reason why many people decide not to be whistleblowers because they fear that the confrontation and subsequent reporting could backfire. Many companies have anonymous procedures in place because of this fear of retaliation. If employees know that someone is committing a fraudulent act, but they are unsure if there will be any repercussions if they have to report the person because of an unsuccessful confrontation they may not be so inclined to do anything. This is not the response that companies want so procedures need to be put into place to ensure the anonymity of the person doing the reporting.