Whistleblowing: the More, the Merrier?
Source: https://bm.hkust.edu.hk/bizinsight/2025/04/whistleblowing-more-merrier Parent: https://bm.hkust.edu.hk/bizinsight/biztalks
[ BizTalks ]
Whistleblowing: the More, the Merrier?
26 Apr 2025
Lee Heng Fellow, Associate Professor
Whistleblowers play a crucial role in maintaining trust in capital markets by exposing fraud. However, is it always true that more whistleblowing is better? The authors identify a nuanced finding: while whistleblowing can enhance audit quality by alerting enforcers to potential misstatements (positive direct effect), it may also reduce the enforcer's investigative effort in the absence of whistleblowing allegations (negative indirect effect). The net effect depends on the trade-off between these forces. Specifically, when enforcers have strong incentives to investigate (e.g., high regulatory pressure) and auditors have weak incentives to improve audit quality (e.g., low legal liability), promoting whistleblowing can paradoxically reduce audit quality and detection efficiency.
The study also explores the socially optimal whistleblowing intensity, showing that it increases with investment costs and the quality of whistleblowers' information. The authors provide policy implications, cautioning against blanket whistleblowing incentives in contexts where enforcers are already highly motivated.
By bridging gaps in the auditing and whistleblowing literature, this paper highlights the importance of balancing whistleblowing programs with regulatory and auditor incentives to achieve optimal financial reporting outcomes. The findings are particularly relevant for policymakers designing whistleblowing frameworks and for firms assessing the interplay between internal controls and external oversight.