The New Public Company Whistleblowing Environment:

Perceptions of a Wrongful Act and Monetary Attitude

Abstract

The enactment of the Sarbanes-Oxley Act (SOX) as well as the recent passage of the Dodd-Frank Act by the Securities and Exchange Commission (SEC) has created a new public company environment for whistleblowing. The Dodd-Frank Act instituted whistleblowing provisions that offers substantial monetary incentives to individuals who report securities law violations directly to the SEC. This outlet is offered in addition to the anonymous reporting hotline that public companies are required to implement by SOX. In response to these provisions, this study examines whether the type of securities law violation (internal trading versus fraudulent financial reporting), individual’s psychological assessments of the wrongdoing and individuals’ monetary attitude, influence intentions to report to an internal hotline and to the SEC. We find that wrongdoing type indirectly affects individual’s intentions to report internally through perceived responsibility. We also find that the perceived responsibility to report increases internal reporting whereas perceived seriousness of the wrongdoing increases reporting to the SEC. Finally, we find that an individual’s monetary attitude influences reporting internally and to the SEC. Specifically, individuals who view money as a source of power are less likely to report to both outlets and individuals who exhibit a distrustful money attitude and more anxiety toward money are more likely to report to both outlets. This suggests that individuals’ monetary attitude does not increase the likelihood reporting to the SEC outlet which offers a reward but rather shapes the overall likelihood of reporting a wrongful act. Keywords: Whistleblowing, Dodd-Frank Act, Monetary Attitude, Seriousness, Responsibility.

Data Availability: Data used in this study is available from the authors upon request.

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Introduction

Beginning with the False Claims Act of 1863, the U.S. government has endeavored to

effectively encourage individuals to report wrongdoing. The most recent federal regulations

related to whistleblower protection have altered the whistleblowing environment at public

companies. Section 304 of the Sarbanes-Oxley Act (SOX) requires audit committees of public

companies to implement a reporting channel which allows employees to confidentially and

anonymously submit claims involving questionable accounting or auditing matters (Lowe et al.,

2014; Zhang et al., 2013). More recently, Section 922 of the Dodd-Frank Wall Street Reform and

Consumer Protection Act created the Securities and Exchange (SEC) whistleblowing program.

This program encourages the reporting of suspicious activity concerning securities law violations

by offering a reward for whistleblowers that voluntarily provide the SEC with original

information that leads to successful enforcement action yielding monetary sanctions of over $1

million.1 Thus, in the current regulatory environment, employees of public companies who

discover wrongful behavior must decide whether to report the behavior to their employer’s

internal anonymous channel and/or anonymously to the SEC.

Public companies and audit committees have expressed concern over the manner in

which the Dodd-Frank incentives may impact employees’ whistleblowing choices. Specifically,

companies are concerned whether these incentives will influence employees to bypass internal

reporting channels in favor of reporting directly to the SEC. Of course companies would prefer

to handle problems internally and fix issues before bringing the matter to the government (Miceli

et al., 2012; Seifert et al., 2014). There is also considerable concern about the reputational

damage that false allegations and tips could have on company’s reputation (Chen et al., 2014;

                                                                                                                         1 While the False Claims Act of 1986 also provided monetary rewards for whistleblowing, the Dodd-Frank Act is

much more extensive in scope as the False Claims Act is only relevant for fraud against the U.S. government

(Awner and Dickins, 2011).

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Johnson, 2010; Pope and Lee, 2013). Moreover, the SEC has looked more favorably on

companies that are forthcoming with their investigations than companies in which the fraud was

uncovered by outside sources (Ernst & Young, 2011).

Given the ramifications of these regulatory changes in the public company environment,

this study investigates two primary factors that may influence individuals to report wrongful

behavior to an internal hotline or externally to the SEC in the current regulatory environment.

The first factor we examine is type of security law violation (fraudulent financial reporting and

insider trading). Understanding the effect of the type of wrongful act in the whistleblowing

process should be of interest to both companies and regulators. Audit committees and SEC

correspondents may wish to educate public company employees about the types of securities law

violations and the importance of reporting all violations regardless of the type. Of further

interest, we examine how certain psychological assessments of these securities law violations

mediate the relation between wrongdoing type and whistleblowing channel. These assessments

include the perceived responsibility to report the wrongdoing and the seriousness of the

wrongdoing.

The second factor we examine is the influence of an individual’s monetary attitude on

reporting preferences. We reason that the whistleblowing process may be affected by an

individual’s expectation that reporting may lead to a beneficial outcome (Miceli and Near, 1992).

In relation to the context investigated in this study, blowing the whistle may lead to a significant

cash reward. Given the opportunity to receive a large monetary reward for successful

enforcement by the SEC of a whistleblowing report, the importance individuals place on

monetary incentives may influence the likelihood of reporting to an external (monetary) channel

compared to an internal channel. Using a scale developed by Yamauchi and Templer (1982), we

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investigate whether an observer’s monetary attitude explains her preference to report to the SEC

relative to an internal hotline.

To examine these factors we conduct an experiment which employs evening and

executive MBA students as participants. The experimental task includes a case which describes a

controller at a public company who suspects the CFO of engaging in fraudulent financial

reporting or insider trading. After reading one of the case scenarios, participants provide

responses to questions about their perception of the suspected wrongdoing and the likelihood that

they would report the suspicious action to the anonymous internal hotline and to the SEC

through the whistleblowing program. Finally, participants provide responses to questions used to

measure their monetary attitude.

To examine the causal relation among the study variables, we employ path analysis to

test a proposed theoretical model. The primary model examines the influence of the type of

securities violation, psychological assessments of this violation, and monetary attitude on the

likelihood of reporting to an internal hotline relative to the SEC. We create a secondary model to

investigate the influence of the individual components of monetary attitude on participants’

reporting preferences. Our results indicate that the relation between wrongdoing type and

reporting intentions is driven by the individuals’ perceived responsibility to report a suspicious

act. That is, an increased perception of the responsibility to report the act leads to an increased

preference to report to the company’s internal hotline. Our study also shows that while the

general preference (found in other studies) is to report through internal channels, individuals who

place a high emphasis on money as a means of power and external recognition prefer to report to

the SEC.

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The results of this study (and models) are relevant to audit committees and other key

personnel in charge of whistleblowing procedures at public companies. These findings assist in

understanding the complex whistleblowing process in terms of how the type of wrongful act,

individuals’ psychological assessments, and monetary attitude shape their decision to blow the

whistle internally through an anonymous hotline or externally to the SEC. Due to the regulatory

and reputational costs that may be incurred if an employee bypasses an internal hotline, this

study should help companies better understand how to encourage internal reporting. For

instance, firms may want to consider implementing their own monetary incentives to encourage

individuals to report internally and avoid potentially costly repercussions of external reporting to

the SEC (Chen et al., 2014). Of course individuals’ attitude toward monetary incentives would

also have to be taken into consideration when assessing the benefits of offering an internal

monetary incentive.

Federal lawmakers and the SEC Office of the Whistleblower would also be well served to

understand factors impacting the whistleblowing process, especially with respect to securities

violations that fall under the jurisdiction of the programs created by SOX and Dodd-Frank. The

first annual report from the Office of the Whistleblower following the implementation of Dodd-

Frank indicated that in order of frequency, market manipulation (16.2 percent), offering fraud

(15.6 percent), corporate disclosure and financials (i.e., fraudulent financial reporting) (15.3

percent), and insider trading (7.5 percent) were the most commonly identified allegations of the

334 total allegations received (SEC, 2011). Investigating employees’ perceptions of two of these

common categories may shed some light on whether a greater frequency of reported financial

reporting irregularities is due to a larger occurrence of this wrongdoing at public companies or

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whether the reporting frequency is due to the role of employees’ perceptions of the wrongdoing

in deciding whether to report to the SEC.

In the following section we provide a background of the literature and present our

theoretical model (see Figure 1) that illustrates and develops the study’s research questions and

hypotheses. We next discuss the experimental method and results from testing the study’s model.

We conclude with a summary of the study’s findings, implications, and limitations.

<<Insert Figure 1 Here >>

Literature Review and Hypothesis Development

The Whistleblowing Reporting Process

An employee’s decision to blow the whistle can be a complex process due to the need to

balance dynamics such as ethical obligations, organizational commitment and potentially

negative repercussions (Miceli, 2004; Near and Miceli, 1995; Siefert et al., 2014). Individual

differences (i.e., level of moral reasoning, dispositional affect, and locus of control) have also

been shown to shape the whistleblowing process (Arnold and Ponemon, 1991; Chiu, 2002; Lowe

and Reckers-Sauciuc, 2010; Zhang et al., 2013). Despite the complexity of this process and

concerns that a whistleblowing report will not be taken seriously, handled appropriately, or kept

confidential (Near and Miceli, 1995; Verschoor, 2005), whistleblowing claims have increased

slightly over time. According to the Ethics Resource Center (2014), 63 percent of employees

surveyed in 2013 said they reported observed misconduct, which is an increase from 56 percent

in 2000. Despite increased reports of retaliation, 92 percent of employees indicated they initially

make efforts to report internally, with only 20 percent eventually reporting to someone outside

the company (Ethics Resource Center, 2014).

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Wrongdoing Type and Reporting Intentions

Type of wrongdoing can influence the likelihood that an individual will report an act.

Robinson et al. (2012) compare reporting intentions for fraud and theft to an anonymous internal

hotline. They find significantly higher intentions to report theft than fraud. In considering why

one type of wrongful act may increase the likelihood of reporting a wrongdoing, Davidson and

Worrell (1988) posit that some crimes are perceived as immoral by default (i.e., pollution) while

other crimes are labeled as immoral because the government has defined them as such (i.e.,

antitrust violations). Such differences in an individual’s perception of the inherent moral

wrongness of an action may influence the associated response to the action (Miceli and Near,

1992). Near et al. (2004) conducted a survey of military employees’ whistleblowing behavior in

response to seven types of wrongdoing (stealing, waste, mismanagement, safety problems,

sexual harassment, unfair discrimination, and other legal violations). They conclude that the type

of wrongdoing is likely to influence the whistleblowing process. Specifically, respondents were

significantly more likely to report certain types of wrongdoing than others. In addition, in the

case of non-anonymous reporting, the forms and extent of retaliation upon whistleblowers varied

by the type of wrongdoing reported. Some employees may be more reluctant to report certain

types of wrongdoing through non-anonymous channels due to fear of retaliation. Thus, there is

reason to believe that wrongdoing type will impact the likelihood of whistleblowing.

Wrongdoing Type and Reporting Channel Preferences

Research has also examined the relation between type of wrongdoing and reporting

channel preferences. Kaplan and Schultz (2007) investigated the relation between the type of

wrongdoing (fraudulent financial reporting, misappropriation of assets, and dishonest

representations by external consultants) and reporting channel (management, internal audit

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department, and an anonymous hotline). The authors do not find a consistent relation across the

types of wrongdoing and reporting channels and conclude that trade-offs related to a particular

reporting channel vary across the type of wrongful act. In light of this finding, they call for future

research that “investigates the explicit links and trade-offs between the questionable act and

reporting channels” (Kaplan and Schultz, 2007, p. 122).

In a related study, Kaplan et al. (2009) find that the likelihood of reporting to a

company’s non-anonymous hotline is greater for misappropriation of assets than fraudulent

financial reporting. Two subsequent studies (Kaplan et al., 2010, 2011) examine the relation

between these two types of fraud and choices among various non-anonymous reporting channels.

No significant relation is found between these two types of fraud and the likelihood of reporting

to a supervisor relative to an internal auditor (Kaplan et al., 2010) or on the likelihood of

reporting to an internal auditor and an external auditor (Kaplan et al., 2011). Thus, while there is

little evidence supporting a relation between wrongdoing type and whistleblowing through

various non-anonymous channels, there appears to be some evidence that type of wrongdoing

influences the choice between anonymous and non-anonymous reporting channels (Kaplan et al.,

2009). Further, there is significant, ongoing research interest in examining these relations.

In the current regulatory environment, employees of public companies are faced with a

choice of reporting through two anonymous channels: (1) internal channels (established in

response to SOX), and (2) the SEC’s on-line portal (established as part of the Dodd-Frank Act).

We examine whether wrongdoing type will impact the likelihood of reporting to these

anonymous channels. Specifically, we investigate the direct effect of the securities violation type

(fraudulent financial reporting or insider trading) on reporting preferences to an internal hotline

versus the SEC’s on-line portal. This leads to our first research question:

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RQ1: Does wrongdoing type directly affect the reporting channel used to whistleblow?

Wrongdoing Type and Psychological Assessments

In the decision to blow the whistle, an employee will weigh the seriousness of the

wrongdoing and their ethical and moral responsibility to report the act against the costs and

benefits of reporting the act (Miceli and Near, 1992). In considering the link between the type of

wrongdoing and an observer’s psychological assessments with respect to the underlying issue,

we posit that there is a causal relation such that the wrongdoing type influences psychological

assessments of the seriousness of the act and the moral responsibility to report the act. In turn,

these psychological assessments influence the choice of whether or not to blow the whistle and

the preferred reporting channel. Therefore, while there may be a direct effect of wrongdoing type

on whistleblowing intentions, we also expect wrongdoing type to indirectly affect the

whistleblowing process through these psychological assessments. The role of these assessments

are based Graham’s (1986) model which posits that two steps are present in the decision to report

a wrongdoing: (1) the awareness that the wrongdoing occurred and (2) the assessment of the

seriousness of the act, the observer’s attribution of responsibility and the perceived feasibility for

a response within the organization.2

Miceli and Near (1992) refer to seriousness as the extent to which the wrongful act recurs

or causes significant financial damages. We investigate two types of wrongdoing which are

securities law violations in the form of financial fraud (fraudulent financial reporting and insider

trading). Both types of financial fraud are committed for personal gain and are likely to have

significant negative economic consequences when discovered by causing abnormal declines in

the company’s stock price and investor confidence in the company. However, the negative

                                                                                                                         2 Miceli and Near (1992) propose a model similar to Graham (1986) with the main difference being the

incorporation of factors that influence observers to blow the whistle to external channels.  

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economic consequences of fraudulent financial reporting may extend beyond insider trading as

the consequences of fraudulent financial reporting often include bankruptcy, being delisted from

a stock exchange, or material asset sales following discovery of fraud (Beasley et al., 2010).

In addition, fraudulent financial reporting has received more media attention than insider

trading given the plethora of cases which led to the Sarbanes-Oxley Act (i.e., Enron, Tyco,

Adelphia, Peregrine Systems, Health South and WorldCom). This may cause observers to focus

on the availability of widely publicized cases of fraudulent financial reporting and as a result

perceive the occurrence of this act to be more common and thus more serious.

Based on the above discussion, observers may make similar assessments with respect to

the seriousness and responsibility to report fraudulent financial reporting and insider trading due

to the underlying motive of the fraud. Alternatively, observers may assess fraudulent financial

reporting as more serious and perceive a greater responsibility to report due to the more apparent

common occurrence and larger economic consequences. This discussion leads to two additional

research questions:

RQ2: Is the perceived responsibility to report greater when the wrongful act is fraudulent financial reporting rather than insider trading?

RQ3: Is the perceived seriousness of fraudulent financial reporting greater than the

perceived seriousness of insider trading?

Psychological Assessments as Mediation Factors

Psychological Assessments and Reporting Intentions

Prior research has investigated whether the likelihood of reporting a wrongdoing

increased with an observer’s assessment of the seriousness of the issue and the attribution of

personal responsibility to respond to the issue. Using a pooled regression which included six

scenarios, Schultz et al. (1993) found that assessments of seriousness and responsibility were

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positively related to the likelihood of reporting the wrongdoing to a supervisor. Notably, the

predictive power of these perceptions varied across subject nationality (United States, Norway,

and France). The authors did not investigate whether these assessments and the associated

influence on reporting likelihoods varied across type of wrongdoing.

In an auditing context, Kaplan and Whitecotton (2001) build on Schultz et al. (1993) and

investigate whether assessments of seriousness and the responsibility to report with respect to a

manager’s professional integrity and the level of inherent risk of an audit client are related to the

likelihood of reporting to the engagement partner and other seniors on the engagement. The

findings from Kaplan and Whitecotton (2001) reveal that the perceived responsibility to report

has a significant influence on reporting intentions while the perceived seriousness does not

influence the reporting intentions. Using the judgment case developed by Kaplan and

Whitecotton (2001), Curtis (2006) finds that both seriousness and responsibility influence the

intention to report to the partner in charge and another senior on the engagement.3 In a

technology context, Ayers and Kaplan (2005) report that perceived seriousness and responsibility

to report increase the likelihood of reporting to a non-anonymous channel (management) and an

anonymous channel (a company based hotline).  

Psychological Assessments and Reporting Channel Preferences

In this study we consider how an individual’s assessment of the seriousness and

responsibility to report a securities law violation influences the preference to report to an internal

hotline relative to the SEC. Graham (1986) argues that the personal responsibility associated

with reporting a wrongdoing is a function of an individual’s social responsibility to report the

wrongdoing, the extent of issue exposure and the individual’s organizational role. Consistent

                                                                                                                         3 Notably, these studies do not investigate the link between type of wrongdoing and the associated assessments of

seriousness and responsibility to report which is the focus of our first research question.  

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with this concept, directors of internal audit indicate that they reported a wrongful act because it

was part of their organizational role (Miceli et al., 1991). Given that the responsibility to report a

wrongdoing stems from an observer acting congruently with their organizational role, we expect

that the responsibility to report may be a function of the observer’s commitment to the

organization. Reporting the wrongdoing internally is beneficial to the company since they can

perform an investigation internally and attempt to address the issue prior to being reported to an

external agency such as the SEC (Chen et al., 2014; Greenberg, 2011; Taylor and Curtis, 2013).

Thus, an increase in the assessed responsibility to report may result in a greater preference to

report to an internal hotline than to the SEC.

We argue that individuals’ assessment of responsibility will ultimately influence the

intention to report to the internal hotline relative to the SEC. Thus, we predict that the assessed

responsibility to report a wrongdoing acts as a mediator between wrongdoing type and the

whistleblowing process. We expect that the level of perceived responsibility to report is

positively related to the preference to report internally to the hotline versus externally to the

SEC. This leads us to hypothesis one:

H1: Perceived responsibility mediates the relation between wrongdoing type and reporting channel preferences with the intention to report internally increasing with the level of responsibility.

According to Miceli and Near (1992), the seriousness of a wrongful act influences the

reporting decision on the basis that a more serious act will increase the likelihood that there will

be a response to the report (i.e., an appropriate response will be taken in response to the report).4

In addition, an employee may find it easier to justify reporting a more serious act due to the

consequences of the wrongdoing. That is, the more serious the act is perceived to be, the more

                                                                                                                         4 Miceli and Near (1992) refer to seriousness as the extent to which the wrongful act recurs or causes significant

financial damages.

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likely it is that the benefits of a resolution will outweigh the costs of reporting. When given a

choice, prior literature suggests that individuals are more likely to report wrongdoing through an

internal channel versus an external channel (Callahan and Collins, 1992; Dworkin and Baucus,

1998; Hooks et al., 1994; Kaplan et al., 2009, 2011; Kaptein, 2011; Ponemon, 1994). However,

Miceli and Near (1985) report that the likelihood of reporting a wrongdoing externally increases

with the seriousness of the issue.

We reason that the assessed seriousness of wrongdoing will influence an observer’s

judgment to report to the SEC relative to the internal hotline by acting as a mediator between

wrongdoing type and the whistleblowing process. We further expect that the assessed

seriousness of an act is positively related to the preference to report externally to the SEC

relative to reporting internally to the hotline. This leads to hypothesis two.

H2: Seriousness mediates the relation between wrongdoing type and reporting channel preferences with the preference to report externally increasing with the level of seriousness.

Monetary Attitude

The Dodd-Frank whistleblowing provisions offer substantial monetary incentives to

whistleblowers who report original information through the SEC’s anonymous on-line portal.

Specifically, these whistleblowers will receive 10 to 30 percent of any money recovered by the

SEC when sanctions exceed $1 million (Carcello et al., 2011; Chen et al., 2014). In response to

the Dodd-Frank provisions, companies, audit committees, and compliance professionals

expressed concern over the effect of these monetary rewards on whistleblowing intentions. Of

particular concern is the effect of these rewards on the choice of internal vs. external reporting

channel in the current regulatory environment (Chen et al., 2011; Deloitte, 2011; Matthews,

2011).

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Miceli and Near (1994) report that the opportunity to receive a monetary incentive was

not a determining factor in their respondents’ decision to blow the whistle. Obtaining a monetary

payout for reporting the wrongdoing of another person is likely to be perceived as an

opportunistic action rather than as an ethical action. However, a monetary incentive that is

significant may have a more influential impact on an individual’s reporting decision. For

example, an increase in the number of reports was observed after the Federal Claims Act

introduced a significant financial reward in the event of a successful conviction and associated

recovery by the government (U.S. Department of Justice, 2007). Similar to the SEC

whistleblower program established by the Dodd-Frank Act, the False Claims Act allows the

whistleblower to recover up to 30 percent of the amount recouped. These monetary rewards have

the potential to be very large as recoveries following the inception of this Act exceed $30 billion

(U.S. Department of Justice, 2012).

The ability of monetary incentives to influence whistleblowing is likely a function of the

reward itself as well as the individuals’ orientation toward money. Callahan and Dworkin (1992)

report that the effect of money on individuals’ motivation depends on the extent to which money

is valued by an individual. How an individual values and perceives money reflects a monetary

attitude that has been shown to vary across individuals (Furham, 1996; Newcomb and Rabow,

1999). We predict that an individual with a high (low) orientation toward money (i.e., high

positive perception of money) will be more (less) likely to be influenced by the presence of the

SEC monetary incentive. This leads to hypothesis three.

H3: Individuals’ high orientation toward money is positively associated with an increased likelihood of reporting to the SEC relative to the internal hotline.

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Method

Participants

Two hundred thirty-four Masters of Business Administration Students (MBA) from three

universities in the United States participated in the study.5,6 Twenty responses were not fully

completed and nine respondents failed the manipulation check resulting in 205 usable responses.

Of the total 205 usable responses there were 144 (70.2 percent) males and 61 (29.8 percent)

females. The average age of participants was 31.67 years (σ = 6.3). Participants had 9.54 years (σ

= 6.38) of work experience and 111 (54.1 percent) reported that they had an experience in the

workplace where they discovered a person of greater authority engaging in a questionable act7.

Experimental Task

Participants received a case instrument (see Appendix A) describing Associated Materials

Inc. (AMI), a hypothetical manufacturer of consumable materials.8 The case describes the

responsibilities of the AMI controller, who is responsible for preparing a large portion of the

financial reports. These reports are reviewed and approved by the Chief Financial Officer (CFO)

prior to filing with the SEC. The case scenario describes the controller’s discovery of evidence

indicating that the CFO had engaged in a suspicious act. This is followed by a description of

AMI’s and SEC whistleblowing provisions.

After reading the case, participants were asked to indicate the likelihood of reporting the

wrongful act to AMI’s internal hotline and to the SEC whistleblower program. After providing

responses regarding the likelihood of reporting the wrongdoing, participants responded to

                                                                                                                         5 Approval for this study was granted by the Internal Review Boards at each of these institutions. 6 The mean responses from the three universities were not significantly different from each other. Therefore, the responses were combined into one aggregate sample. 7 Prior experience of discovering a superior engaging in a questionable act was not significant when included in the

study’s model as a possible control variable (p = 0.45) nor did it impact the fit or results of the model. 8 The whistleblowing scenario used in this study was subjected to a series of pilot tests with undergraduate and

MBA students to ensure that the information was presented clearly.

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questions regarding their perception of the wrongdoing. This included their perception of the

seriousness of the wrongful act and their perceived responsibility to report the wrongful act.

Participants also responded to a manipulation check question which asked them to identify the

type of wrongdoing in the case (fraudulent financial reporting or insider trading). Next,

participants responded to a series of questions designed to measure their monetary attitude

(Yamauchi and Templer, 1982) and subsequently answered demographic questions.

Independent Variables

Wrongdoing (Securities Violation) Type

The type of wrongdoing was operationalized between participants at two levels:

fraudulent financial reporting and insider trading. These wrongdoings represent two of the

securities law violations covered by the whistleblowing provisions of the Dodd-Frank Act (SEC,

2011). These specific violations were selected for several reasons. First, both wrongdoing types

are most often committed by executives such as the CEO and CFO. Second, the wrongdoing

types are likely to be more familiar to individuals as compared to other securities law violations

such as market manipulation, securities offering fraud, Foreign Corrupt Practices Act (FCPA)

violations and unregistered offerings. Third, both wrongdoing types are committed by an

individual with the aim of obtaining a personal financial benefit and are likely to have significant

negative economic consequences.

The fraudulent financial reporting case involved suspicion of improper asset valuation,

which is a frequent method of fraudulent financial reporting (ACFE, 2006, p. 19-23; Kaplan et

al., 2010). Specifically, the case stated that AMI’s earnings announcements indicated that the

company had met financial targets for the year. The controller was surprised when these

announcements were released because he knew that the financial reports that he prepared showed

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that the company had not met the financial targets. The financial reports that the controller

prepared, went to the CFO for review and approval prior to being released to analysts and filed

with the SEC. Upon reviewing the accounting records, the controller found where he had

recorded a series of items related to building maintenance as expenses. The suspicious act

consisted of the CFO posting a series of journal entries into the accounting system that

inappropriately changed the classification of these items from expenses to long-term assets.

Expenses were underreported by increasing assets which had the effect of significantly

increasing income. Based on this evidence, the controller suspects that the CFO changed the

expense classification in order to meet the aggressive financial targets. Such an action is

considered fraudulent financial reporting and is a felony under federal law.

For the insider trading treatment, the case indicated that shortly after year-end, the

controller reviewed the company’s proxy statement and was surprised to see that the financial

reports filed with the SEC showed that the CFO only held 0.05 percent of AMI’s outstanding

stock when the CFO had previously held about 7 percent. The controller also recalled that AMI

was cited by the Environmental Protection Agency (EPA) for unsafe disposal of waste materials

from production. When the EPA made this information public, AMI’s stock price experienced a

significant drop in price. The CFO’s stock had been sold on the same day that AMI was

contacted by the EPA, and the trading activity had not been reported to the SEC as required by

Section 12 of the Securities Exchange Act 1934. The case then states that the controller suspects

that the CFO engaged in insider trading which is a violation of the Securities and Exchange Act

of 1934 and is a felony under federal law.

Monetary Attitude

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Monetary attitude was included as a measured independent variable in the study’s model.

This construct was measured with a series of questions from the Yamauchi and Templer (1982)

scale. Participants responded to 29 questions using a response format consisting of a 7-point

scale with end-points labeled “never” and “always.” The coefficient alpha for the 29 items is

0.82.9 Individuals with a high score on the scale have a more positive attitude toward situations

involving money. This scale was chosen on the basis of higher internal reliability and fewer

questions (29 questions versus 60 questions) than the Furnham (1984) and Furnham et al. (1996)

scales. Further, this scale has been used in several previous studies (e.g., Engelberg and Sjöberg,

2006; Gresham and Fontenot, 1989; Medina et al., 1996; Roberts and Sepulveda, 1999; Yang

and Lester, 2002).

Yamauchi and Templer’s (1982) 29 question monetary attitude scale encompasses four

psychological constructs including time, distrust, anxiety and power-prestige. This

conceptualization of monetary attitude is supported by prior research (Furham, 1984; Gresham

and Fotenot, 1989; Medina et al., 1996; Roberts and Sepulveda, 1999; Tang, 1993). The time

construct reflects the importance placed on planning for the future financially. Individuals with a

high time score focus on preparing for the future with a goal of financial security. This construct

is defined by seven items (α = 0.84). The distrust construct captures an attitude of reluctance and

hesitation with respect to involvement with situations that involve money. Individuals with a

high distrust score exhibit reluctant and doubtful attitudes to circumstances that involve money.

Seven questions are used to measure this construct (α = 0.82). The anxiety construct reflects the

level of anxiety that an individual feels with respect to issues around money and includes

apprehension and nervousness about money. Individuals with a high anxiety score view money

                                                                                                                         9 We measure internal consistency of these items with Cronbach’s alpha. George and Mallery (2001) provide the

following rules of thumb: α > 0.9 is excellent, α > 0.8 is good, α > 0.7 is acceptable, α > 0.6 is questionable, α > 0.5

is poor, and α < 0.5 is unacceptable.

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as a source of anxiety but also a source of protection from anxiety and thus as a form of security.

This factor is defined by six items (α = 0.64).10 Finally, the power-prestige construct reflects the

tendency to rely on money as a method of impressing and influencing others and as a sign of

achievement. Individuals with a high power-prestige score focus on the importance of status

seeking, competition, and external recognition. Nine questions are used to measure this construct

(α = 0.72).

Dependent Variable

The study’s primary dependent variable is constructed using participants’ responses to

two questions which reflect the available whistleblowing channels at publicly traded companies.

The first available channel is the company’s anonymous internal hotline which was required by

Section 302 of the Sarbanes-Oxley Act. Participants were asked, “How likely is it that you would

self-report this instance of questionable behavior to the AMI whistleblowing hotline” with

endpoints labeled “1 = very unlikely” and “7 = very likely”. In conjunction with the

requirements of SOX, participants were told the information reported to the third-party internal

hotline would be confidential and immediately sent to the Company's General Legal Counsel.

Such complaints are then forwarded to the Audit Committee and, if necessary or advisable,

appropriate company personnel.

The second channel is the recently created SEC whistleblowing online portal which was

created by Section 922 of the Dodd-Frank Act. Participants were asked, “How likely is it that

you would self-report this instance of questionable behavior to the online SEC Tips, Complaints,

and Referrals portal” with endpoints also labeled “1 = very unlikely” and “7 = very likely.”

Participants were provided with a description of the SEC whistleblower provision which entitles

                                                                                                                         10 An analysis was performed to determine if dropping any items would improve the reliability, however, exclusion

of one or more items did not improve the internal consistency.

19

 

employees to a substantial cash reward if they voluntarily provide the SEC with original

information about a violation of federal securities laws (i.e., financial fraud, securities violations,

bribery etc.). Further they were told that to receive a reward monetary sanctions must exceed $1

million, that their identity would remain anonymous, and that a report to the SEC is valid if they

report internally as long as the employee provides the same information to the SEC within 120

days.

Psychological Assessments of Wrongdoing

Participants’ psychological assessments of the wrongful act are included in the study’s

model as mediating variables. Perceptions regarding the responsibility to report the act are

measured with the question, “Please assess the personal responsibility (duty or obligation) to

proactively inform the company after discovering the questionable act discovered in the case.”

The seriousness of the wrongful act is measured with the question, “Please indicate the

seriousness (i.e., the amount of harm done) of the questionable act described in the case.” Each

question was measured using a seven point scale with endpoints labeled “very low = 1” and

“very high = 7.”

Social Desirability Bias Variable

As social desirability bias is often a concern in experiments investigating whistleblowing

behaviors, participants were also asked to provide internal and SEC reporting intentions in the

third person (e.g., they indicated how likely they thought it was that the controller would report

through each of these channels). The responses to these additional two questions were used to

create a social desirability bias measure which is included in the study’s model. Following

Chung and Monroe (2003), Cohen et al. (1998, 2001) and Kaplan et al. (2010, 2011), a social

desirability bias measure was calculated by subtracting the reporting difference score from the

20

 

perspective of the witness (third person) from the reporting difference score of one’s own

perspective (first person).

Results

Summary Statistics

Table 1 presents descriptive statistics for the study’s independent, mediating, and

dependent variables. Participants perceived that the fraudulent financial reporting wrongful act to

be more serious (t = 3.17, p < 0.01, two-tailed), and that they had a greater responsibility to

report this wrongdoing (t = 3.35, p < 0.01, two-tailed) than the insider trading wrongful act.

There were no significant differences across the two wrongdoing types for monetary attitude nor

for any of its components. Further, there were no significant differences across wrongdoing type

on any of the reporting intention variables (reporting to the hotline, reporting to the SEC, and the

reporting difference score). Notably, participants indicate a greater preference to report

internally than externally to the SEC for both the insider trading scenario (t = 1.68, p < 0.10,

two-tailed) and the fraudulent financial reporting scenario (t = 3.39, p < 0.01, two-tailed). This

preference was more pronounced for the fraudulent financial reporting scenario.

<<Insert Table 1 Here >>

Statistical Model

We estimate the study’s model with path analysis using maximum likelihood estimation

via AMOS software. Path analysis was chosen since it enables testing of both direct and indirect

(mediating) causal effects simultaneously in one model. This is more concise than testing direct

effects using an ANOVA and indirect effects with separate regression analysis. Thus, path

analysis enables a more concise test of the study’s model and also allows for a specification of

how well the model fits the data.

21

 

Model Fit

Model fit is assessed for the model using common fit indices including the Chi-square

(χ2) test statistic, Comparative Fit Index (CFI), and the Root Mean Square Error of

Approximation (RMSEA). The model has a good fit to the data (χ2 = 20.88, p = 0.29; CFI =

0.99; and RMSEA = 0.03). The conclusion regarding the model fit is based on an insignificant

Chi-square (Joreskog, 1969), a CFI greater than 0.95 (Hu and Bentler, 1999), and a RMSEA less

than 0.06 (Hu and Bentler, 1999; Kaplan, 2000). The results from the tested model are presented

in Figure 2.11

<<Insert Figure 2 Here >>

Control Variables

Due to their association with the dependent variable, we investigated several control

variables for inclusion in the model including gender (Taylor and Curtis 2013), work experience,

and the social desirability variable. The path loading between the social desirability measure and

the reporting difference score was positive and significant (ß = 0.61, p < 0.01). The path loading

between work experience and the reporting difference score was negative and marginally

significant (ß = -0.05; p < 0.10). The path loading from gender to the reporting difference score

was not significant (ß = 0.40; p = 0.11). These variables improved the fit of the model and thus

are included in the retained model.

Research Question and Hypotheses Tests

Research Question 1

The direct path from wrongdoing type (fraudulent financial reporting, insider trading) to

the reporting difference score is used to examine RQ1. The path loading is negative and

                                                                                                                         11  To ensure that the independent variables (money attitude and wrongdoing type) did not interact, we included an

interaction term in the path model. The interaction term was insignificant (ß = -0.03, p = 0.95).  

22

 

insignificant (ß = -0.12, p = 0.62) which suggests that in the public whistleblowing environment,

there is no direct effect of wrongdoing type on the preference to report to the internal hotline

relative to the SEC.

Research Question 2

We next examine the path between wrongdoing type and the assessed responsibility to

report the wrongdoing, as stated in RQ2. The path loading from wrongdoing type to

responsibility is negative and significant (ß = -0.56, p < 0.01). This indicates that participants

perceived a greater responsibility to report fraudulent financial reporting than insider trading.

Consistent with this, participants reported a higher mean responsibility to report the fraudulent

financial reporting act as compared to insider trading (t = 3.35, p < 0.01, two-tailed).

Research Question 3

For RQ3, we examined the path between wrongdoing type and the assessed seriousness

of the wrongdoing. We again find a negative and significant path loading between wrongdoing

type and seriousness (ß = -0.48, p < 0.01) which suggests that the fraudulent financial reporting

act is perceived as more serious than the insider trading act. This is consistent with the finding

that participants assessed the fraudulent financial reporting act as more serious than the insider

trading act (t = 3.17, p < 0.01, two-tailed).

Hypothesis 1

Hypothesis one predicts that responsibility mediates the relation between wrongdoing

type and reporting channel preferences with the intention to report internally to the hotline

increasing with the level of responsibility. To test for mediation we employ the steps outlined in

Kenny et al. (1998).12 To begin with, we examine the path between wrongdoing type and the

                                                                                                                         12 We also tested for mediation using the traditional Baron and Kenny (1986) steps. We find the same results under

both frameworks.

23

 

assessed responsibility to report the wrongdoing. As reported above, the path loading from

wrongdoing type to responsibility is negative and significant (ß = -0.56, p < 0.01). Next, we turn

to the path between responsibility and the reporting difference score, which is also significant (ß

= 0.25, p < 0.05). The significance of these paths suggests that responsibility mediates the

association between wrongdoing type and the reporting difference score (Kenny et al., 1998).

The positive sign on the path between responsibility and the reporting difference score suggests

that a greater responsibility to report is related an increased intention to report internally to the

hotline.

We further interpret responsibility as a mediating variable given the insignificant path

loading between wrongdoing type and the reporting difference score (ß = -0.12, p = 0.62). The

significance of responsibility as a mediator and the insignificance of the direct path from

wrongdoing type to the reporting difference score indicates that the effect of wrongdoing type is

fully explained by an observer’s assessed responsibility to report the wrongdoing (Kenny et al.,

1998). Thus, the type of wrongdoing impacts the likelihood of reporting to the internal hotline

indirectly through the perceived responsibility to report the wrongdoing. Based on the

recommendation of MacKinnon et al. (2002), a Sobel mediation test (Sobel, 1982) is also

performed to confirm the presence of mediation. A significant Sobel mediation test confirms the

presence of mediation between wrongdoing type and responsibility (z = 2.39, p < 0.01). Overall,

these findings provide support for H1.

Hypothesis 2

Hypothesis two predicts that the seriousness of the issue mediates the relation between

wrongdoing type and reporting channel preferences, with the preference to report externally to

the SEC increasing with the level of seriousness. The negative and significant path loading

24

 

between wrongdoing type and seriousness (ß = -0.48, p < 0.01) indicates that the fraudulent

financial reporting act is perceived as being more serious than the insider trading act. However,

the path loading between seriousness and the reporting difference score is insignificant (ß = 0.16,

p = 0.23). An insignificant Sobel mediation test confirms this absence of mediation (z = 1.21; p

= 0.30). As such, we conclude that mediation is not present (Kenny et al., 1998). The

insignificant path from seriousness to the reporting difference score suggests that the seriousness

of an act does not lead to a difference in reporting channel selection. These findings do not

provide support for H2.

Hypothesis 3

Hypothesis three predicts that an individual with a high (low) orientation toward money

will be more (less) likely to be influenced by the presence of the SEC monetary incentive. To test

this proposed relation, we examine whether individuals’ monetary attitude predicts reporting

channel preferences with respect to the internal hotline and to the SEC. The path loading

between money attitude and the reporting difference score is not significant (ß = 0.11, p = 0.58).

This suggests that monetary attitude in general does not predict the preference of reporting

channel.

Although monetary attitude is not significantly related to reporting channel preferences,

the individual monetary attitude constructs may explain channel preferences. As wrongdoing

type indirectly affects the reporting difference score, we construct two separate path models for

fraudulent financial reporting and insider trading. The independent variables are the four

monetary attitude constructs: time, distrust, anxiety and power. The dependent variable is the

reporting difference score. The means for the reporting difference score are reported by the

median split for each monetary attitude component in Table 2. We also include the social

25

 

desirability bias variable, responsibility to report, gender, and work experience as control

variables given their correlation with the dependent variable and an improvement of model fit

with their inclusion.13

<<Insert Table 2 Here >>

The conventional fit measures suggest that the model is a good fit (χ2 = 25.58, p = 0.21;

CFI = 0.90; RMSEA = 0.05) for the insider trading model and for the fraudulent financial

reporting model (χ2 = 21.11, p = 0.13; CFI = 0.90; RMSEA = 0.05) (Hu and Bentler, 1999;

Joreskog, 1969; Kaplan, 2000). The path loading between power and the reporting difference

score is negative and significant in both the insider trading (ß = -0.59, p < 0.01) and fraudulent

financial reporting models (ß = -0.57, p < 0.01) (see Figure 3). This suggests that individuals that

use money as a means of impressing others and for external recognition have a preference to

report to the SEC relative to the internal hotline. Notably, obsession with money is a

subcomponent of the power construct developed by (Yamauchi and Templer, 1982). We also

find a positive and significant path loading between distrust and the reporting difference score (ß

= 0.45, p < 0.05) in the insider trading model. This suggests that individuals that have some

hesitancy and a suspicious attitude toward money have a greater tendency to report to the

internal hotline relative to SEC hotline. Thus, while H3 was not supported via the overall

measure of monetary attitude, certain constructs of the monetary scale are related to channel

reporting preferences.

<<Insert Figure 3 Here >>

                                                                                                                         13  The social desirability bias control variable is positively related to the reporting difference score in both the

insider trading model (ß = 0.54, p < 0.01) and the fraudulent financial reporting model (ß = 0.50, p < 0.01). For the insider trading model only, responsibility is positively related to the reporting difference score (ß = 0.34, p < 0.01)

and work experience is negatively related to the reporting difference score (ß = -0.05, p < 0.05). For the fraudulent

financial reporting model, gender has a marginally significant negative relation with the reporting difference score

(ß = -0.04, p < 0.10).

26

 

Discussion and Implications

Recent regulatory changes have altered the public company environment for whistleblowing.

SOX requires public companies to implement an anonymous internal reporting channel; the

Dodd Frank Act provides monetary incentives for individuals to report directly to the SEC.

These actions have created an environment in which individuals have a choice to whistleblow

through an anonymous internal channel and/or to directly report to the SEC (with potential

monetary incentives). In our study we examine two relevant factors that may influence

individuals’ reporting channel preferences ─ wrongdoing type and monetary incentive attitude.

More importantly, we examine the underlying whistleblowing process to determine the extent to

which responsibility to report and the seriousness of the issue provide the impetus to choose a

particular reporting channel.

Our results reveal that while the direct relation between wrongdoing type and reporting

intentions is not significant, wrongdoing type significantly impacts the perceived responsibility

to report an act, which in turn significantly influences reporting channel preferences. More

specifically, an increased perception of the responsibility to report the act leads to an increased

preference to report to the company’s internal hotline. This suggests that it is not the wrongdoing

type that directly affects whistleblowing behavior but rather individuals’ perception of

responsibility to report the act. This finding should be of interest to public companies in terms of

highlighting the importance of promoting their whistleblowing compliance programs in response

to the new competing SEC program. To encourage internal reporting, companies may benefit by

communicating the importance and relevance of these securities violations and employees’

responsibility to report them internally. This may be especially important for those acts that

27

 

employees may not have initially felt a strong responsibility to report or for those acts that they

may have found to be irrelevant for internal reporting.

The SEC might also be interested in our findings as they attempt to understand the

reporting pattern of the various securities law violations. Our study indicates that fraudulent

financial reporting is perceived as being more serious and participants feel a greater

responsibility to report this act than insider trading. This finding draws attention to the

prevalence of fraudulent financial reporting at public companies due to managerial incentives

associated with a firm’s stock price. It also may reflect a more casual perception of insider

trading in which people rationalize that they should be able to make decisions about their

property based on what they know, even though it is not common knowledge (Statman, 2009).

Beams et al. (2003) provide evidence that insider trading isn’t universally recognized as being a

detriment to the capital markets as it is often regarded as an economic issue rather than a moral

issue. In fact, some scholars argue that insider trading, despite being illegal, continues to occur

because norms may fail to consider it as being unethical (Kaplan et al., 2009). Future research

should be directed toward determining the underlying reasoning for these perceptions of insider

trading and, more importantly, how to diffuse them. Research may also extend the current study

by investigating how individuals’ perceive different securities law violations such as market

manipulation and violation of the FCPA. Future research could also investigate the influence of

perceptions other than seriousness and responsibility to report.

We also investigate how individual differences in monetary attitude influence channel

reporting choices. This issue is of particular interest in the current reporting environment given

the concern over the impact of the SEC whistleblowing incentives. Prior research indicates that

generally individuals feel that whistleblowing should be motivated by ethical concerns rather

28

 

than monetary incentives (Greenberg, 2011). However, there are potential costs to blowing the

whistle such as loss of reputation or ridicule, which may be offset by such incentives (Gao et al.,

2014). Companies, however, fear that the large monetary incentives offered by the SEC may

cause individuals to over-report insignificant claims, or to time report in a strategic manner that

allows them to maximize potential payoffs from the SEC.

This study’s results reveal that while the general preference (found in other studies) is to

report through internal channels, individuals who place a high emphasis on money as a means of

power and external recognition prefer to report to the SEC. In contrast, those individuals that

exhibit distrust towards money prefer to report through the internal hotline which does not offer

a monetary incentive. This finding should be of interest to public companies as it suggests that

certain individuals may be encouraged to report to the SEC due to the possibility of receiving a

significant cash reward. Thus, companies would be well served by communicating the benefits

of internal reporting and letting employees know that the company is positioned to process and

preliminarily investigate whistleblower allegations quickly, to make informed decisions and to

strictly adhere to the anonymity requirement. Companies may also want to consider offering a

reward for internal reporting. Although an internal reward may not be as substantial as that

offered by the SEC, it may be persuasive enough to encourage internal reporting since it may be

viewed as a less risky alternative than corresponding with SEC officials. This notion is consistent

with the finding of Brink et al. (2013) that an internal reward encourages internal reporting when

the evidence surrounding the wrongdoing is weak.

This study is subject to several limitations. First, the study only assesses participants’

intentions to report the wrongful act in a hypothetical scenario which lacks the actual dynamics

present in a real scenario such as social pressure and fear of retaliation. Second, the study does

29

 

not offer actual monetary rewards, thus it may not capture the full effect of the possible

substantial reward offered by the SEC Whistleblower Program for a successful conviction.

Finally, the study’s model only considers participants’ assessments of the responsibility to report

and the seriousness of the act as depicted by Graham (1986). It is likely that participants’

assessments of other situational characteristics may directly or indirectly influence the decision

to report the wrongdoing.

30  

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Appendix A

Associated Materials Inc. Overview (Insider)

Associated Materials Inc. (AMI) is a manufacturer of industrial consumable materials. Formed in 1975, the company specializes in the production of fiberglass substrates for bonded abrasive applications in the reinforced grinding wheel industry. The company also manufactures and markets a variety of chemical resins for the automotive and composite industries. The company, which employs approximately 2,200 people in its plants, trades on the NYSE. Since AMI is a publicly traded company, it is required to file quarterly reports (10Q) and an annual report (10K) with the Securities and Exchange Commission (SEC). The financial results for the past few years indicate that AMI has produced steady operating results, but these results are still just below the operating results of key industry competitors. Casey Dalton has several years of accounting experience and is the controller for AMI. His responsibilities involve cost accounting, financial reporting, resolving tax issues, and organizing and preparing accounting information for internal decision making. Although Dalton is responsible for preparing a large portion of the financial reporting for external reporting purposes, what he prepares is reviewed and approved by Sean Miller, Chief Financial Officer (CFO) prior to filing with the SEC. Shortly after the company’s year-end, Dalton reviewed the company’s most recent proxy statement (DEF14a) filed with the SEC. Dalton spent a significant amount of time preparing these financial reports and was quite familiar with them. However, Dalton is not responsible for certain items reported in the proxy statement including shareholdings by executives. Dalton was surprised to see that the financial reports filed with the SEC showed that Miller only held 0.05% of AMI’s outstanding stock given that last year Miller held about 7%. Dalton also recalled that AMI was cited by the Environmental Protection Agency (EPA) for unsafe disposal of waste materials from production. When the EPA made this information public, AMI’s stock price experienced a significant drop in price. Section 12 of the Securities Exchange Act 1934 requires that executives report trading transactions of their company’s stock within two business days. Dalton went to the SEC website and noted that Miller did not report this trading activity to the SEC which indicates that he was deliberately hiding his trading activity from the SEC. In support of his engagement in insider trading, AMI records indicate that Miller sold a majority of his shareholdings the same day that AMI was contacted by the EPA. In further support of an insider trading violation, it is clear that Miller sold his shares on the basis of private information. Since Miller sits on the board of directors, he was one of the few individuals aware of the EPA’s citation prior to public disclosure. Dalton is absolutely certain that Miller engaged in insider trading which is a violation of the Securities and Exchange Act of 1934 and is a felony under federal law.

AMI’s Whistleblowing Provisions

When Dalton was hired he was informed that AMI has a whistleblowing hotline. Employees with complaints about wrongful behavior by another employee are highly encouraged to submit

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them confidentially through AMI’s third party Whistleblower Complaint Hotline Service (the "Hotline Service"). This will ensure that the complaint is addressed in a timely manner by the appropriate AMI personnel and will allow for an internal investigation of the wrongdoing. Not only will whistleblowing internally allow AMI to conduct a prompt investigation, it will also mitigate the possibility of external pressures due to governmental investigations and bad publicity. All complaints submitted to the Hotline Service are immediately sent to the Company's General Legal Counsel. Such complaints are then forwarded to the Audit Committee and, if necessary or advisable, appropriate Company personnel.

SEC Whistleblowing Provisions

Dalton also remembers learning about a whistleblower provision in the recently adopted Dodd-Frank Act. The provision entitles employees to a substantial cash reward if they voluntarily provide the SEC with original information about a violation of federal securities laws (i.e., financial frauds, securities violations, bribery etc.). To receive the reward the information must lead to the successful enforcement of a covered judicial or administrative action, or a related action resulting in monetary sanctions exceeding $1million. Complaints are made directly through the SEC Tips, Complaints, and Referrals portal on-line. A whistleblower may submit the information to the SEC anonymously. However, prior to the payment of an award the whistleblower must disclose his or her identity to the SEC. The SEC must keep this information confidential, except to other regulatory authorities. This provision also states that the SEC will treat an employee as a whistleblower under the SEC program as of the date that the employee reports the information internally (i.e., through the AMI Hotline) — as long as the employee provides the same information to the SEC within 120 days.

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Associated Materials Inc. Overview (FFR)

Associated Materials Inc. (AMI) is a manufacturer of industrial consumable materials. Formed in 1975, the company specializes in the production of fiberglass substrates for bonded abrasive applications in the reinforced grinding wheel industry. The company also manufactures and markets a variety of chemical resins for the automotive and composite industries. The company, which employs approximately 2,200 people in its plants, trades on the NYSE. Since AMI is a publicly traded company, it is required to file quarterly reports (10Q) and an annual report (10K) with the Securities and Exchange Commission (SEC). The financial results for the past few years indicate that AMI has produced steady operating results, but these results are still just below the operating results of key industry competitors. Casey Dalton has several years of accounting experience and is the controller for AMI. His responsibilities involve cost accounting, financial reporting, resolving tax issues, and organizing and preparing accounting information for internal decision making. Although Dalton is responsible for preparing a large portion of the financial reporting for external reporting purposes, what he prepares is reviewed and approved by Sean Miller, Chief Financial Officer (CFO) prior to filing with the SEC. When the AMI’s financial reports were filed with the SEC, Dalton was surprised to hear earnings announcements that the company had met financial targets for the year. Dalton spent a significant amount of time preparing these financial reports and was quite familiar with them. Dalton knew that the financial reports that he prepared showed that the company had not met the financial targets. Therefore, he was surprised to see that the financial reports filed with the SEC showed that the company had met the financial targets. He recalled that the financial reports he prepared went to the CFO, Miller, for review and approval prior to being released to analysts and filed with the SEC. Dalton went through the accounting records carefully to see what had happened and whether he had made a mistake that Miller had corrected. After further investigation, Dalton was confident that Miller had engaged in an unethical act of misreporting financial information. Dalton had properly recorded several items related to building maintenance as expenses last year. After year end, Miller posted a series of journal entries into the accounting system that inappropriately changed the classification of these items from expenses to “long-term assets”. That is, expenses were underreported by increasing assets. This had the effect of significantly increasing income. Miller had not talked with Dalton before improperly changing the classification of these expenses. In further support of the act of misreporting financial information, Dalton noted that the same items had been expensed in prior years. Therefore, Miller’s changes were clearly out of harmony with prior year reports. Dalton is absolutely certain that Miller intentionally and inappropriately changed the expense classification. This resulted in a significant understatement of expenses which enabled Miller to meet the aggressive financial targets. Such an action is considered fraudulent financial reporting and is a felony under federal law.

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AMI’s Whistleblowing Provisions

When Dalton was hired he was informed that AMI has a whistleblowing hotline. Employees with complaints about wrongful behavior by another employee are highly encouraged to submit them confidentially through AMI’s third party Whistleblower Complaint Hotline Service (the "Hotline Service"). This will ensure that the complaint is addressed in a timely manner by the appropriate AMI personnel and will allow for an internal investigation of the wrongdoing. Not only will whistleblowing internally allow AMI to conduct a prompt investigation, it will also mitigate the possibility of external pressures due to governmental investigations and bad publicity. All complaints submitted to the Hotline Service are immediately sent to the Company's General Legal Counsel. Such complaints are then forwarded to the Audit Committee and, if necessary or advisable, appropriate Company personnel.

SEC Whistleblowing Provisions

Dalton also remembers learning about a whistleblower provision in the recently adopted Dodd-Frank Act. The provision entitles employees to a substantial cash reward if they voluntarily provide the SEC with original information about a violation of federal securities laws (i.e., financial frauds, securities violations, bribery etc.). To receive the reward the information must lead to the successful enforcement of a covered judicial or administrative action, or a related action resulting in monetary sanctions exceeding $1million. Complaints are made directly through the SEC Tips, Complaints, and Referrals portal on-line. A whistleblower may submit the information to the SEC anonymously. However, prior to the payment of an award the whistleblower must disclose his or her identity to the SEC. The SEC must keep this information confidential, except to other regulatory authorities. This provision also states that the SEC will treat an employee as a whistleblower under the SEC program as of the date that the employee reports the information internally (i.e., through the AMI Hotline) — as long as the employee provides the same information to the SEC within 120 days.