Whistleblowing is considered the most effective method of detecting large corporate frauds. For example, Cynthia Cooper and Sharon Watkins are famous whistleblowers who spilled the beans on the frauds at WorldCom and Enron, respectively. Unfortunately, the corporate world, and society in general, hasn't always treated whistleblowers as heroes. In fact, many whistleblowers are blamed for the negative effects of fraud (such as job layoffs) when fraud comes to light. For example, Cynthia Cooper experienced this and speaks about being shunned by the people in her town after she brought WorldCom's massive fraud to light. Basically, society seems to perpetuate the Kindergarten stigma of being a "tattle tale" and, as a result, they shoot the messenger when it comes to reporting fraud.
Since Enron and WorldCom, many government regulations have been established to provide incentives to whistleblowers. The Sarbanes-Oxley Act requires internal whistleblowing programs at publicly traded companies while the False Claims Act and, more recently, the Dodd-Frank Bill provide incentives for whistleblowers to tell government officials about fraud. The False Claims Act applies to acts that defraud the Federal Government while the Dodd-Frank Bill applies to any public company who commits fraud and involves basically any fraud that is regulated by the federal government. As we've discussed before, the government incentives can lead to millions in rewards to an individual who blows the whistle if the government collects more than $1 million from the company.
The WSJ has an interesting article that talks more about the tension these regulations have led to. Basically, SOX has led public companies to have internal whistleblowing systems while Dodd-Frank leads whistleblowers to go outside the company to blow the whistle. Unfortunately, I'm not sure there are any easy answers since it seems both programs are important. The internal program is needed for smaller amounts (frauds that lead to less than $1 million in fines to the Federal Government don't apply to the Dodd-Frank Act) while it seems that whistleblowers of large frauds may not be treated fairly at a corporate level, especially if top management is involved.
I guess there are no simple and profitable solutions for preventing and detecting fraud in a business environment that is ethically bankrupt. In my opinion, as long as families fail to instill ethical values in the home, the forecast for this tension and cost is not looking good. If society continues to deteriorate because families fail to instill ethical values in the home, regulation will either cripple business or fraud will become more rampant.