Study: Second-Hand Reports More Reliable

Some news thats both useful to corporate compliance officers and totally relevant to our political drama in Washington: fresh research shows that whistleblower reports based on second-hand information tend to be more reliable than those from first-hand reporters. Moreover, second-hand reports are more likely to be about accounting or business integrity issues; and the more second-hand reports a company gets, the fewer lawsuits and smaller regulatory settlements its likely to pay out in future years.

The findings come from an academic paper published earlier this week by Kyle Welch of George Washington University and Stephen Stubben of the University of Utah. These are the same researchers who last year published pioneering research demonstrating that more internal reporting correlates to better business outcomes overall. This paper is the latest in a series of follow-on reports theyve released since then. For this study, the researchers studied 2 million whistleblower reports from more than 1,000 companies from 2004 through 2017.

The data came from Navex Global, one of the largest providers of internal hotline systems in the world. (The data was also anonymized, so rest easy that nobody saw any specific allegations at specific companies.) The big conclusion: management is 47.7 percent more likely to substantiate allegations submitted in a second-hand report which is defined as information passed along to the reporter from someone else; or that the reporter discovers accidentally by finding evidence of misconduct, without witnessing the act directly.

One passage from the study says it all: Firsthand reports are more frequently made in person, more frequently involve reports of human resource (HR) issues such as harassment and discrimination, and contain more details about the reported event. By comparison, reports based on secondhand information are disproportionately reports of accounting and financial concerns and business integrity issues. Theres a lot to unpack in that paragraph, so lets get to it. The Costs of Whistleblowing First-hand reports are more likely to be from employees reporting something that has happened to them: an abusive manager, a discriminatory promotion policy, a coworker harassing them. Of course the reporter could provide more detail, because he or she experienced the misconduct directly. First-hand reports are also more likely to be frivolous: people complaining about coworkers who cut their toenails too loudly or turn down the thermostat too often, for example. And if first-hand reports are more likely to be frivolous, that also means theyre less likely to be substantiated, even if they contain more details.

Second-hand reports, however, are an employee who is reporting that something might be amiss within the company. He or she is more likely to have only fragmentary evidence, because they arent involved with the misconduct directly. Second-hand reports are also more likely to be about accounting or integrity issues because (a) were less likely to notice HR issues that dont happen to us; and (b) people are less likely to report accounting and integrity issues where they might be complicit in the misconduct. In other words, compliance officer should take second-hand reports seriously because the reporter is more likely to care about the well-being of the company.

Thats not to say that first-hand reports about HR issues are less important or can be ignored. They cant. But first-hand reports are more likely to come from employees who seek some personal benefit from reporting: a manager disciplined, a policy reversed, a promotion granted. Second-hand reports come from employees who care about the companys well-being for its own sake. They have less to gain from reporting their concerns, so theyre more likely to be objective and to have more finely tuned ethical antennae, since theyre speaking up about something that doesnt concern them directly. Its also logical, then, that more second-hand reports in one year correlates to fewer lawsuits and smaller regulatory settlements in future years. These reports tend to involve regulatory compliance or accounting fraud more often, and those issues can be more expensive to resolve.

So if the company solves those problems today, thats litigation or regulatory enforcement youre less likely to face tomorrow. Think about it: an employee reporting that he or she is getting harassed might want a manager fired or several years worth of salary in a legal settlement. When someone reports that you have an FCPA violation or earnings manipulation, those costs can easily run into the millions. As to second-hand reports having fewer details well, so what? Whistleblower reports are supposed to be an alarm to catch managements attention, nothing more. The rest depends on the ethical rigor of management to hear the alarm and take it seriously.

Second-Hand Reports More Reliable, and tell me whether you agree or disagree with the authors opinion. Also, explain why you agree or disagree, i.e. does it make sense to you?