How to interpret the increase in corporate whistleblower reports

Companies worldwide have received and substantiated an increasing number of employee reports about unethical or non-compliant incidents in the past five years, according to two 2014 reports.

The Network, which evaluated nearly 650,000 corporate hotline reports client employees filed from 2009 to 2013, recorded 9.27 incidents per 1,000 employees in 2012 and 9.72 incidents per 1,000 employees in 2013. That reflected a 4.8% increase in each of the two years.

Eighty-one per cent of the incident reports filed in 2013 warranted an investigation, an increase of 8 percentage points from 2009, according to the Network’s 2014 Corporate Governance and Compliance Hotline Benchmarking Report.

NAVEX Global, which analysed more than 2 million corporate hotline reports filed in the past five years, recorded a 33% increase in the reporting rate in the past three years. The rate at which the incident reports were substantiated rose from 29% in 2009 to 40% in 2013, according to NAVEX’s 2014 Ethics and Compliance Hotline Benchmark Report.

The Network and NAVEX Global, both software companies, provide corporate governance, risk, and compliance solutions to thousands of clients across the globe.

The companies attributed the increases to:

• Ethics and compliance programmes that have improved corporate communications and training strategies.
• Employees’ higher confidence in line management’s ability to respond appropriately after seeing hotline reports produce results.
• Board members and top executives who have become more interested in reducing the risks from unethical and non-compliant incidents.
• More media coverage of whistleblower protections, lawsuits, and awards.
• Government officials who encourage reports of observed misconduct.
• Companies doing a better job entering and tracking reports received from sources other than phone and the internet.

Ethics and compliance have become more important as an increasing number of businesses have expanded to markets that are rapidly growing but risky, and regulatory scrutiny has tightened.

In 2002, the US Sarbanes-Oxley Act began offering corporate whistleblowers significant protection, and in 2010 tougher UK anti-bribery laws augmented the already far-reaching US Foreign Corrupt Practices Act, which has been in place since 1977.

Twelve years after Sarbanes-Oxley took effect, the SEC announced a whistleblower award of $30 million, the largest to date for key information leading to a successful enforcement action.

And multinationals are spending heavily on regulatory compliance. To investigate possible bribes paid overseas, including in Mexico, US retailer Walmart, for example, reported in SEC filings that it spent about $282 million in fiscal 2014 and projected spending another $200 million to $240 million in fiscal 2015.

Benchmark details

The Network and NAVEX benchmark reports provide further details to help companies better assess their individual hotline reports of unethical or non-compliant incidents:

Most incident reports. Companies with fewer than 5,000 employees consistently had the highest incident report rates. In 2013, their rate was 15.72  reports per 1,000 employees, according to The Network report. Companies with 20,000 to 50,000 employees came in second, with 9.43 incident reports per 1,000 employees in 2013.

In 2012, construction became the industry with the most incident reports. In 2013, the report frequency rate per 1,000 employees was 18.73 in the construction industry. Transportation, communications, and utilities came in second with 17.42, and public administration was third with 11.69.

Nearly half of all incident reports (45%) recorded by The Network in 2013 were about personnel management, which includes concerns over wages, hours, benefits, and promotions. Among the incident reports analysed by NAVEX, 73% were related to HR, diversity, or workplace respect issues. The aerospace and defence industries had the highest median reporting rate.

The Network report pointed out that “ethics and compliance hotlines are not the vehicles employees should use for HR or employee relations issues.”

The report also noted that the bulk of all incident reports (85.1%) recorded by The Network came from North America.

Substantiation rates. Accounting, auditing, and financial reporting and misuse and misappropriation of corporate assets consistently had the lowest median reporting rates, 3% and 6%, respectively, in 2013, according to the NAVEX report. The median substantiation rates for those two categories were the two highest, though, reflecting efficient company training and policies.

In 2013, 56% of recorded misuse and misappropriation incidents were substantiated, up from 50% in 2012, and 55% of recorded accounting, auditing, and financial reporting incidents were substantiated, up from 52% the previous year.

The number of incident reports recorded by The Network that warranted an investigation rose to 72% in 2012, up 5 percentage points over 2011. Forty-eight per cent of the investigated incident reports in 2013 led to corrective action, the highest in five years.

Forty-nine per cent of all incident reports ended in counselling or a disciplinary action, an 11 percentage point increase from 2012.

Anonymous reports. About half of all incident reports analysed by The Network during the past five years were filed anonymously. Anonymous reporting was most prevalent in public administration (60%) and the finance, insurance, and real estate industries (57%).

The median anonymous reporting rate among incident reports analysed by NAVEX was 60% in 2013, down from a five-year high of 65% in 2009. The median substantiation rate of anonymous reports (36%) was slightly lower than for named reports (45%) in 2013.

Repeat reporters. In 2013, 31% of the incident reports analysed by NAVEX were filed by repeat reporters, up from 14% in 2009. But the NAVEX report warned against discrediting repeat reporters. Their reports are substantiated at a rate 5% higher than those of first-time reporters.

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—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.