Owing to several notable financial frauds involving whistleblowers, regulators took steps to strengthen whistleblowing provisions. One prominent example is the Dodd-Frank whistleblower program which provides financial rewards to whistleblowers who report financial fraud to the SEC. While regulators may believe that the Dodd-Frank whistleblower law helps deter accounting fraud, whistleblower tips can be frivolous and processessing such tips is not cost-less. Similar to all too many public policies, little empirically is known about the the Dodd-Frank whistleblower provision's efficacy.
In a recent paper, Did the Dodd-Frank Whistleblower Provision Deter Accounting Fraud?, Philip Berger (Chicago--Booth Business) & Heemin Lee (Baruch College) examine whether the Dodd-Frank whistleblower law has a causal effect on the deterrence of fraud and quantify the size of the deterrence effect. Exploiting a control group of firms previously exposed to state-level false claims statutes, the paper sets out to assess the "underlying (or ex ante) likelihood of accounting fraud decreases for firms subject to Dodd-Frank and not previously exposed to the risk of whistleblowing" via analogous state laws. At least as it relates to Dodd-Frank's whistleblowing component, the paper a finds a decrease in the probability of fraud attributable to whistleblower provisions. The abstract follows.
“We examine the deterrence effect of the Dodd-Frank whistleblower provision on accounting fraud. To facilitate causal inference, we use state False Claims Acts (FCAs), under which whistleblowing about accounting fraud at a firm invested in by a state's pension fund can result in monetary rewards from that state’s government. We divide our sample into firms exposed and not exposed to whistleblowing risk from a state FCA during the 2008 – 2010 period that preceded the 2011 SEC implementation of the Dodd-Frank whistleblowing provision. We hypothesize that firms already exposed to a state FCA whistleblower law are less affected by the Dodd-Frank whistleblower provision. Using the companies exposed to a state FCA as control firms in our Dodd-Frank tests, the remaining firms constitute the treatment sample. We find that exposure to Dodd-Frank reduces the likelihood of accounting fraud of treatment firms by 12% to 22% relative to control firms, but do not find that it affects audit fees.”
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