Who Blows the Whistle on Corporate Fraud?

A forthcoming study in the Journal of Finance focuses on improving our understanding of fraud detection methods.  The authors discuss their paper at the Harvard Law School Corporate Governance Blog.  Here is a sampler of their discussion:

The main result emerging from our analysis is that in the United States fraud detection relies on a wide range of, often improbable, actors. No single one of them accounts for more than 20 percent of the cases detected. These findings suggest that to improve corporate governance abroad one needs to adopt a broader view than implied by the legal or private litigation approaches to corporate governance.

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The second main result is that the incentives for the existing network of whistleblowers are weak. Auditors, analysts, and employees do not seem to gain much and, in the cases of employees, seem to lose outright from whistleblowing. The two notable exceptions regarding who benefits from whistleblowing are journalists involved in large cases and employees who have access to a qui tam suit.

A natural implication of our findings is that the role of monetary incentives should be expanded. We find that the use of monetary rewards provides positive incentives for whistleblowing. As the evidence in the healthcare industry shows, such a system appears to be able to be fashioned in a way that does not lead to an excessive amount of frivolous suits.