Chief Audit Executive & Whistle Blowing

8/17/2019 Chief Audit Executive & Whistle Blowing

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BEHAVIORAL RESEARCH IN ACCOUNTING American Accounting AssociationVol. 24, No. 2 DOI: 10.2308/bria-501542012pp. 87–99

Chief Audit Executives’ Evaluations of Whistle-Blowing Allegations

Cynthia P. Guthrie

Bucknell University

Carolyn Strand Norman

Virginia Commonwealth University

Jacob M. Rose

Victoria University of Wellington

ABSTRACT: This study examines the effects of the source of whistle-blowing

allegations and potential for allegations to trigger concerns about reputation threats on

chief audit executives’ handling of whistle-blowing allegations. The participants for this

study, chief audit executives (CAEs) and deputy CAEs, evaluated whistle-blowing

reports related to financial reporting malfeasance that were received from either an

anonymous or a non-anonymous source. The whistle-blowing reports alleged that the

wrongdoing resulted from either the exploitation of substantial weaknesses in internal

controls (suggesting higher responsibility of the CAE and internal audit) or thecircumvention of internal controls (suggesting lower responsibility of the CAE or internal

audit). Findings indicate that CAEs believe anonymous whistle-blowing reports to be

significantly less credible than non-anonymous reports. Although CAEs assessed lower

credibility ratings for the reports alleging wrongdoing by the exploitation of substantial

weaknesses in internal controls, they allocated more resources to investigating these

allegations.

Keywords: chief audit executive; internal controls; whistle-blowing.

INTRODUCTION

Section 301(4) of the Sarbanes-Oxley Act of 2002 (hereafter, SOX) requires that public

companies establish procedures for receiving and reviewing complaints regarding

accounting and controls, and SOX requires firms to establish a confidential and anonymous

channel for reporting such complaints. Recent research finds that anonymous reporting systems can

be dysfunctional because audit committee members view allegations received through anonymous

reporting channels to be less credible than non-anonymous reports (Hunton and Rose 2011).

The authors thank our anonymous reviewers, Theresa Libby, Jim Hunton, Steve Kaplan, Susan McCracken, participants

of the 2010 ABO Conference, and participants of workshops at Virginia Commonwealth University and BucknellUniversity for their valuable comments and suggestions.


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Further, Hunton and Rose (2011) find that when whistle-blowing allegations threaten the

reputations of corporate directors, the directors justify decisions to limit the investigation of

allegations by ascribing low levels of credibility to the allegation. They propose that parties other

than the audit committee should receive and evaluate the veracity of allegations received through

whistle-blowing systems to avoid the threats to effective governance that result from directors’

self-interests.

If an organization decided to identify an individual or a department, other than the audit

committee, to receive and evaluate whistle-blowing reports, perhaps the most likely choice would

be the chief audit executive (CAE). A recent study found that CAEs had the responsibility of

following up on allegations from anonymous whistle-blowers in more than half of the firms

surveyed (Kaplan and Schultz 2006). Read and Rama (2003) specifically call for the examination

of internal auditors’ reactions to whistle-blowing reports. Accordingly, the current study expands

our understanding of whistle-blowing effectiveness by examining CAEs’ handling of whistle-

blowing allegations.

We investigate whether CAEs are subject to the same judgment biases exhibited by audit

committee members. CAEs may not exhibit the same biases as directors because CAEs face moreaccountability and direct oversight than do directors. While directors have accountability in the

director labor market, directors’ decisions are made in relative secrecy, and their decision processes

are not known to others. Norman et al. (2011) point out that CAEs, on the other hand, report

functionally to the audit committee and administratively to executive management (IIA 2000), and

their work is overseen by multiple parties. Thus, the decisions of CAEs are far more transparent and

subject to more scrutiny than are the decisions of the board of directors. Increased accountability

decreases the likelihood that agents will make self-serving choices (Simonson and Nye 1992;

Tetlock and Lerner 1999). Thus, CAEs’ handling of whistle-blowing allegations should be less

influenced by motivated reasoning than will be directors’ handling of whistle-blowing allegations.

This research is important because internal auditors are involved in the overall process of corporate governance, and are expected to assess uncertainties and recommend courses of action to

deal with those uncertainties (Bloom et al. 2009). Internal auditors also play an ever-expanding role

in advising company management, the audit committee, and independent auditors on many issues

concerning the organization’s performance (Bloom et al. 2009). In addition, internal auditors are

assuming more responsibility for a broader spectrum of risks, including a greater role in preventing

and detecting fraud (PWC 2007).

We administered a 2 3 2 between-participants experiment to 52 CAEs and 47 deputy CAEs

who evaluated whistle-blowing reports related to financial reporting malfeasance that were received

from either an anonymous or a non-anonymous source. Our results add to the extant literature on

whistle-blowing reports in a number of ways. First, and most importantly, our study is the first toexamine the attitudes and opinions of CAEs, who are often given the primary responsibility of

investigating whistle-blowing allegations. Second, our findings indicate that CAEs ascribe a lower

level of credibility to anonymous whistle-blowing reports relative to non-anonymous reports. Third,

when allegations threaten their reputations, CAEs further lower their assessed credibility of the

allegations. Finally, we demonstrate that CAEs are not subject to the same decision biases as are

directors. Even though CAEs ascribe the lowest levels of credibility to anonymous allegations that

threaten their reputations, the CAEs continue to expend resources to investigate these allegations. In

fact, the CAEs increased their resource allocations when the CAEs perceived the most

responsibility for the allegation. It appears that CAEs are not subject to the same effects of

motivated reasoning as our directors when making decisions to investigate a whistle-blowing

allegation that holds the potential to harm a CAE’s reputation. Our findings should be of interest to

boards of directors, audit committees, and senior management who are accountable to investors and

88 Guthrie, Norman, and Rose


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HYPOTHESES DEVELOPMENT

Examination of Whistle-Blowing Allegations

SOX includes two provisions to facilitate corporate whistle-blowing. The first (SOX Section

806) involves an update of existing laws to protect whistle-blowers from employer retaliation. The

second provision mandates a mechanism for anonymous whistle-blowing. Section 301(4) of SOXspecifically charges the audit committee of public companies with ‘‘establishing procedures for (a)

the receipt, retention, and treatment of complaints received by the issuer regarding accounting,

internal accounting controls, or auditing matters; and (b) the confidential and anonymous

submission by employees of the issuer of concerns regarding questionable accounting or auditing

matters’’ (U.S. House of Representatives 2002). SOX requires publicly traded firms to provide

systems for reporting allegations, but firms must still have the discretion to decide who will handle

whistle-blowing allegations, and the parties responsible for overseeing the allegations must decide

which allegations require investigation and the extent of investigation required. While whistle-

blowing is an important mechanism for discovering information about agency problems at firms

(Bowen et al. 2010), research also finds that whistle-blowing systems can be dysfunctional due toperceptions of anonymous whistle-blowing allegations and threats to objectivity created by

motivated reasoning (Hunton and Rose 2011).

Over 67 percent of audit committees participating in a 2002 Institute of Internal Auditors

survey (IIA 2004) reported that, for the first time, they were reviewing whistle-blowing allegations.

Although the audit committee is charged by SOX with establishing and overseeing the anonymous

whistle-blowing channel, committees frequently turn to the internal audit function to review

whistle-blowing allegations. A recent study by Kaplan and Schultz (2006) found that CAEs were

assigned the responsibility of following up on allegations from anonymous whistle-blowers in

approximately two-thirds of the sampled companies. While audit committees are commonly the

initial recipients of whistle-blowing allegations, CAEs are often the first to investigate the

allegations. Thus, it is critical to determine whether CAEs are subject to the same judgment biases

documented by Hunton and Rose (2011).

Effectiveness of Anonymous Whistle-Blowing

Near and Miceli (1995, 681) define whistle-blowing effectiveness in terms of ‘‘whether the

whistle-blower accomplished what he or she set out to do—namely, the implementation of

organizational change.’’ In one of their analyses of the 1980 U.S. Merit Systems Protection Board

data (n ¼ 8,587), Near and Miceli (1985) found that 80 percent of respondents chose efficacy as oneof the two most important outcome factors that influenced their choice to report wrongdoing. The

researchers suggest that whistle-blowers are likely to act only if they perceive the incident of wrongdoing to be serious enough that they feel compelled to report it, if they are aware of the

available reporting channels, and if they believe their efforts will result in the discontinuation of the

wrongful act.

The whistle-blower’s credibility is a primary determinant of whistle-blowing effectiveness.

Near and Miceli (1995) suggest that increases in the perceived credibility of allegations lead to

greater efforts to investigate the allegations and increased likelihood that the allegations will result

in organizational change. According to Rains (2007), anonymous sources are generally judged to

be less trustworthy and more likely to be associated with irrelevant information. More specifically, a

recent study of audit committee members finds that these members assess the credibility of

anonymous reports significantly lower than the credibility of non-anonymous reports (Hunton and

Rose 2011). Given that both theoretical models and one empirical study to date indicate that

anonymous reports are deemed to be less credible than non-anonymous reports, we propose the

Chief Audit Executives’ Evaluations of Whistle-Blowing Allegations 89


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H1a: CAEs will perceive anonymous whistle-blowing allegations to be less credible than non-

anonymous allegations.

Anonymous whistle-blowing reports may be more time consuming and difficult to investigate

because the report recipient cannot consult with the whistle-blower to gather additional information

(Miceli and Near 1992; Near and Miceli 1995), which would increase the resources needed toinvestigate an allegation. Although anonymous reports may require more resources than non-

anonymous reports for thorough investigation, credibility is a critical factor. Audit committee

members allocate fewer resources to anonymous allegations, relative to non-anonymous

allegations, because they find anonymous allegations to be less credible (Hunton and Rose

2011). Further, if a CAE has past experience with poor results from anonymous whistle-blowing

allegations, the CAE is likely to doubt the wisdom of allocating the additional resources that may be

required to investigate allegations received in such a manner. Consequently, the following

hypothesis regarding how CAEs will choose to allocate resources to investigate whistle-blowing

reports is offered:

H1b: CAEs will allocate fewer resources to investigating anonymous whistle-blowingallegations than they will allocate to investigating non-anonymous whistle-blowing

allegations.

Reputation Effects and Motivated Reasoning

The internal audit function performs a crucial organizational role by providing management,

the board of directors, external auditors, and the audit committee with assurance that key controls

within the organization are designed appropriately, operating effectively, and functioning properly

to protect stakeholders (Lundin 2009). The intent of a strong system of internal controls is to

provide reasonable assurance regarding the achievement of company objectives, reliability of financial reporting, and compliance with applicable laws and regulations. When an organization has

strong internal controls, it is more difficult for employees to commit wrongdoing. In order to do so,

the employee would need to be devious and clever enough to know how to circumvent or ‘‘get

around’’ the policies, procedures, and processes that comprise the internal controls system of the

organization. Thus, if fraudulent financial reporting was accomplished by the circumvention of

internal controls, the CAE would be less likely to shoulder primary responsibility than if the fraud

was accomplished by taking advantage of weak or missing controls.

If an organization had a weak system of internal controls, one could make the case that the

internal audit function was not performing its governance role of providing assurance that the

internal control system was capable of protecting company assets. In such a situation, an otherwisehonest person might be tempted to exploit, or take advantage of, a perceived weakness in the

control system of the organization. Thus, a discovery of fraudulent financial reporting in a firm with

weak controls would be a clear signal that the CAE had failed in some critical aspect of

responsibility to assist executive management in maintaining effective internal controls over

financial reporting. Consequently, this study adopts the exploitation of substantial weaknesses in

internal controls and the circumvention of internal controls as operationalizations of higher and

lower levels, respectively, of responsibility for alleged fraud.

Motivated reasoning theories indicate that decision makers can employ biased cognitive

processes as strategies for accessing, constructing, and evaluating beliefs. Moreover, needs and

motives influence mental processes in ways that enable the decision maker to maintain illusions of

objectivity (Kunda 1990; Pyszczynski and Greenberg 1987 ). Decision makers can engage in biased

information evaluation and processing to arrive at the conclusion that they desire. Ambiguity in the



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In forming a judgment about a specific event, individuals go through the process of evaluating

the situation and accessing pertinent existing beliefs. Decisions incorporate intentional evaluations

of beliefs, and subconscious beliefs and motives. Although CAEs are charged with exhibiting the

highest level of professional objectivity and with making judgments based on unbiased evaluations

of all the relevant circumstances (IIA 2000), CAEs face threats to their objectivity that arise fromsubconscious biases. Internal auditors are employees of the organizations they audit; accordingly,

they face concerns over retaliation for and personal costs of their decisions and actions. Even those

CAEs who report functionally to the audit committee must face the reality that they still serve the

CEO. They can encounter the consequences of negative reputation effects and career penalties if a

decision or action is viewed unfavorably by executive management or the audit committee.

Brownstein (2003, 545) explained that ‘‘biased predecision processing occurs when decision

makers restructure their mental representations of the decision environment to favor one alternative

before making a choice.’’ Such restructuring of mental representations is most often on a

subconscious level. Predecision processing biases have also been described as motivated reasoning.

Kunda (1990) states that motivated reasoning takes place when the decision maker uses biased

cognitive processes as strategies for accessing, constructing, and evaluating beliefs. Directional

goals reflect the desire or need for specific conclusions or outcomes, and these goals affect

reasoning by influencing which information will be considered in the judgment and decision-

making process (Kunda 1990). Pyszczynski et al. (1985) conclude that individuals judge

information that is consistent with a self-serving bias to have higher validity than information that is

not consistent with that bias. Furthermore, this distorted evaluation of information allows

individuals to generate and maintain such self-serving beliefs without forsaking the need to have

logical consistency between their conclusions and the evidence at hand.

When allegations suggest that CAEs have failed in their duties and are responsible for a fraud,

CAEs’ judgment processes can be biased such that they perceive allegations to not be credible. We

test the following hypothesis:

H2a: Increased responsibility for the fraud described in a whistle-blowing allegation will

result in lower assessments of allegation credibility, relative to decreased responsibility.

Hunton and Rose (2011) found that motivated reasoning caused directors to allocate fewer

resources to allegations that created greater reputation threats, relative to investigations that created

lesser reputation threats. As explained above, the moral dilemma of the responsibility to follow up

on allegations of financial statement fraud that may, if proven to be true, harm one’s reputation

could certainly provide the catalyst for biased directional goals. However, unlike assessments of

credibility, the allocation of resources to allegations has measurable effects on the firm and the

effectiveness of its whistle-blowing system. When a decision has meaningful consequences, theneed to justify the reasonableness of both the process and the conclusion constrains the tendency to

adopt biased processing strategies (Sanitioso and Kunda 1991; Boiney et al. 1997). When

individuals are held accountable for their decisions, they tend to make decisions that others find

acceptable and others believe are not biased (Simonson and Nye 1992; Tetlock and Lerner 1999).

CAEs are far more accountable for their decisions than are directors, and CAEs report to both upper

management and the audit committee (Norman et al. 2011). Their decisions are relatively

transparent and evaluated by multiple parties. Thus, high levels of accountability could constrain

the tendency of CAEs to adopt biased processing.

Given that existing research indicates that forces act to both encourage and discourage

motivated reasoning by CAEs, we examine the following null hypothesis:

H2b: Increased levels of responsibility arising from a whistle-blowing allegation will not



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METHODOLOGY

Participants

Fifty-two CAEs and 47 deputy CAEs from U.S. companies and organizations participated in

the study. Eleven participants failed a manipulation check, three participants did not complete the

instrument, and one deputy listed less than one year of internal audit experience. The final sample(i.e., those who completed the entire experiment and responded correctly to manipulation checks)

consists of 45 CAEs and 39 deputy CAEs. CAEs and deputy CAEs represent the experts within

firms who are most often charged with evaluating whistle-blowing allegations. As such, this group

provides an excellent participant/task match.

The mean years of participants’ internal audit experience is 12.76. Participants also have mean

external audit experience of 2.56 years and mean corporate accounting experience of 3.26 years.

The mean tenure with the current organization is 9.28 years. In total, approximately 60 percent of

participants are CPAs and 50 percent are CIAs. More than 80 percent of participants are from

publicly traded companies. Of the participants from non-public companies, half were former CAEs

of public companies, and the remaining hold senior positions in consulting firms that performinternal audit functions for public companies. Seventy-five percent of participants are in companies

listed in the Fortune 1000.

Judgment Task

The task used in the present study was adapted from Hunton and Rose (2011). First, each

participant was asked to assume the role of CAE for a hypothetical company. Participants were

informed that the internal audit function had evaluated the company’s internal controls and reported

to management that no material weaknesses in controls were found. Participants were then

presented with a brief background of the company. Next, participants were informed that a whistle-

blowing report was received, which alleged that senior managers had materially overstated earningsin order to earn their bonuses.

Following the case information, participants assessed the credibility of the whistle-blowing

allegation. After assessing credibility, participants completed manipulation check questions and

debriefing questions. CAEs are difficult participants to obtain, and they place significant value on

their time. As a result, the case and debriefing questions were designed to require only 15 minutes

to complete. The researchers personally visited the offices of the participants to administer the case

study. All but three of the case studies were completed in the presence of the researchers. The three

exceptions (one CAE and two deputy CAEs) were completed and returned via email.

Experimental Design

This experiment employs a 23 2 between-participant design. The first manipulated condition

is report source, either anonymous or non-anonymous. Although a primary purpose of the whistle-

blowing channel mandated by SOX is to provide for anonymous reports, employees also use the

channel for non-anonymous reporting. A benchmark report on the use of hotlines revealed that just

more than half (54 percent) of the calls received were anonymous ( Security Executive Council

2007). The second manipulated condition is the method of fraud involved in the allegation

(circumvention of internal controls or exploitation of substantial weaknesses in internal controls).

Variable Measures

Report Source

The whistle-blowing allegation contains a manipulation of the report source, which is either



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An anonymous [A non-anonymous] source, the identity of whom you do not [do] know,

has filed a report alleging that senior managers have been managing earnings in order to

earn their bonuses, and the earnings management resulted in a material overstatement of

2006 revenue.

Method of Fraud

The fraud manipulation was designed to create two levels of responsibility for the fraud. In the

lower responsibility condition, the fraud was allegedly perpetrated by the circumvention of internal

controls. In the higher responsibility condition, the fraud was allegedly perpetrated by the

exploitation of substantial weaknesses in internal controls.

The allegation further states that the managers increased reported earnings by

[circumventing internal controls] [exploiting substantial weaknesses in internal controls].

Internal auditors play a key role in maintaining and testing compliance with internal controls

over financial reporting. Consequently, the discovery of a breach in controls that internal audit hadpreviously inspected might indicate that the CAE and internal audit function had not been as

diligent as expected in overseeing the evaluation process. Although the revelation of fraudulent

reporting by the circumvention of internal controls would also be disturbing, it would not imply as

much ineffectiveness on the part of internal audit or the CAE as would exploitation of control

weaknesses.

Credibility

After reading the case, participants assessed the credibility of the whistle-blowing report (the

first dependent variable).

Based only on the information presented on the preceding pages, what is your assessment of the credibility of the whistle-blowing report? Please circle one of the percentages on the

scale below to indicate your assessment.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Not

Credible

at All

ModeratelyCredible

Completely

Credible

Resource Allocation

Participants also decided how much of their budget they should expend to investigate the

allegation (the second dependent variable).

When budgeting for potential whistle-blowing investigation expenses for this year, you

assumed that there could be as many as two significant reports and that each investigation

would cost approximately $50,000, for a total budget of $100,000. Assume that you still

have $100,000 remaining in this year’s budget and that no other whistle-blowing reports

will be investigated this year. Any funds that you do not use to investigate the whistle-

blowing report will carry forward to your next general budget. The budget for your

department has always been tight, and you have important projects for next year that will

not be fully funded. Based only on the information presented on the preceding pages,

indicate the dollar amount of this year’s whistle-blowing budget that you would allocate

toward investigating this whistle-blowing report. Please enter the amount on the line



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RESULTS

Manipulation Checks and Preliminary Tests

The first manipulation check asked the participant what type of whistle-blowing report was

included in the case just completed (anonymous source versus non-anonymous source). The second

manipulation check asked each participant to identify the source of fraud that was alleged (either circumventing internal controls or exploiting substantial weaknesses in internal controls). Eleven

participants failed one of the first two manipulation checks in accordance with their assigned

condition and are not included in the statistical analyses. Further, three participants did not complete

all of the experimental materials and one deputy listed less than one year of internal audit

experience. Thus, the final sample size for all analyses is 84 participants.

We also conducted checks to ensure that our manipulation of fraud type induced the expected

effects on perceived responsibility for the fraud. We asked participants the following:

Should the allegation be true, what level of responsibility do you believe internal audit has

for the wrongdoing?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Not at All

Responsible

Moderately

Responsible

Extremely

Responsible

Would you feel any degree of personal responsibility for the earnings management should

the allegation be true?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

I WouldNot Feel

At All

Responsible

I WouldFeelModeratelyResponsible

I WouldFeelCompletelyResponsible

Participants indicated that they believed internal audit was more responsible (p ¼ 0.005) when thefraud involved exploitation of a control weakness (mean ¼ 40.4 percent) than when the fraudinvolved circumvention of a control (mean ¼ 22.9 percent). Participants also perceived morepersonal responsibility (p ¼ 0.023) when the fraud involved exploitation of a control weakness(mean ¼ 39.8 percent) than when the fraud involved circumvention of a control (mean ¼ 27.1percent). Thus, the manipulation of fraud type was successful in creating different perceptions of

responsibility for the fraud.

Finally, statistical analyses comparing the demographic variables across the treatment

conditions indicate non-significance for all demographic variables (p . 0.2). Thus, randomization

of treatment conditions was effective regarding the distribution of demographic factors.

Tests of Hypotheses

The first two hypotheses evaluate the effects of the source of a whistle-blowing allegation on

CAEs’ perceptions and handling of the allegations. H1a is tested with an ANOVA model where

credibility assessment is the dependent variable. The independent variables are report source

(anonymous versus non-anonymous), method of fraud (exploitation versus circumvention), and an

interaction term. Table 1, Panel A shows means, standard deviations, and sample sizes for the



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variable for report source is statistically significant (F ¼ 4.410, p ¼ 0.039). The pattern of means in

Panel A indicates that credibility assessments are lower for anonymous reports (0.448) relative tonon-anonymous reports (0.525). Thus, H1a is supported.1

We test H1b with an ANOVA model where the allocation of resources to the investigation of

the whistle-blowing allegation is the dependent variable. The independent variables are report

source (anonymous versus non-anonymous), method of fraud (exploitation versus circumvention),

an interaction term, and a covariate for position in firm (CAE or deputy CAE).2 Table 2, Panel A

shows means, standard deviations, and sample sizes for the resource allocations across treatment

conditions, and Panel B shows the ANOVA results. The report source variable is not statistically

TABLE 1

Credibility of Whistle-Blowing Allegation

Panel A: Mean (Standard Deviation) fSample Sizeg across Treatment Conditions

Report SourceMain Effect:

Method of FraudAnonymous Non-Anonymous

Method of Fraud

Circumvention 0.475 0.581 0.529

(0.155) (0.160) (0.165)

f20g f21g f41gExploitation 0.420 0.474 0.449

(0.204) (0.174) (0.188)

f20g f23g f43g

Main Effect: Report Source 0.448 0.525 0.488(0.181) (0.174) (0.181)

f40g f44g f84g

Cell means represent assessments of whistle-blowing allegation credibility based upon the following scale: Based onlyon the information presented on the preceding pages, what is your assessment of the credibility of the whistle-blowingreport? (0% ¼ Not Credible at All, 50% ¼ Moderately Credible, 100% ¼ Completely Credible).Method of Fraud ¼ circumvention of internal controls or exploitation of substantial weaknesses in internal controls.Report Source ¼ an anonymous source or a non-anonymous source for the whistle-blowing allegation.

Panel B: ANOVA

Source

Type III

Sum of Squares df Mean Square F Sig.

Report Source 0.134 1 0.134 4.410 0.039

Method of Fraud 0.137 1 0.137 4.530 0.036

Source 3 Method 0.014 1 0.014 0.467 0.496

Error 2.426 80 0.030

Total 22.708 83

1 We also test H1a with an alternative measure of allegation credibility and find the same pattern of results withsimilar levels of statistical significance.

2 A preliminary ANOVA that included the demographic variables as covariates indicated that CAEs allocatedsignificantly more resources to all allegations than did deputy CAEs and we retained this variable as a covariate



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significant (F ¼ 0.073, p ¼ 0.788). H1b is not supported, and we do not find evidence that CAEs

allocate fewer resources to anonymous, relative to non-anonymous, allegations. This finding is not

the same as prior results for audit committee members, who allocated fewer resources to

anonymous allegations.

H2a and H2b investigate the potential for motivated reasoning to influence CAEs’ perceptions

of the credibility of allegations and allocation of resources to the investigation of allegations. Table

1 displays the results of the test of H2a, which posits that CAEs will perceive lower levels of

allegation credibility when the allegation suggests more responsibility for the alleged fraud on the

TABLE 2

Allocation of Resources to the Investigation of the Whistle-Blowing Allegation

Panel A: Mean (Standard Deviation) fSample Sizeg across Treatment Conditions

Report SourceMain Effect:

Method of FraudAnonymous Non-Anonymous

Method of Fraud

Circumvention 63,000 70,952 67,073

(26,576) (28,400) (27,477)

f20g f21g f41gExploitation 78,250 76,739 77,442

(28,941) (28,668) (28,460)

f20g f23g f43gMain Effect: Report Source 70,625 73,977 72,381

(28,492) (28,358) (28,300)

f40g f44g f84g

Cell means represent the dollar amount of resources allocated to the investigation of the whistle-blowing allegation basedupon the following question: When budgeting for potential whistle-blowing investigation expenses for this year, youassumed that there could be as many as two significant reports and that each investigation would cost approximately$50,000, for a total budget of $100,000. Assume that you still have $100,000 remaining in this year’s budget and that noother whistle-blowing reports will be investigated this year. Any funds that you do not use to investigate the whistle-blowing report will carry forward to your next general budget. The budget for your department has always been tight,and you have important projects for next year that will not be fully funded. Based only on the information presented onthe preceding pages, indicate the dollar amount of this year’s whistle-blowing budget that you would allocate towardinvestigating this whistle-blowing report. Please enter the amount on the line below.

Method of Fraud ¼ circumvention of internal controls or exploitation of substantial weaknesses in internal controls.Report Source ¼ an anonymous source or a non-anonymous source for the whistle-blowing allegation.

Panel B: ANOVA

Source

Type III

Sum of Squares df Mean Square F Sig.

Report Source 45,948,241 1 45,948,241 0.073 0.788

Method of Fraud 1.869E10 1 1.869E10 2.961 0.089

Source 3 Method 1.040E9 1 1.040E9 1.649 0.203

CAE or Deputy 1.369E10 1 1.369E10 21.690 0.000

Error 4.896E10 79 4.896E10Total 5.066E11 84



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0.036), and the means in Panel A indicate that credibility assessments are lower for allegations

involving the exploitation of control weaknesses (0.449) relative to allegations involving the

circumvention of controls (0.529). Thus, H2a is supported, and there is evidence of motivated

reasoning when assessing the credibility of allegations.

To examine the role that perceptions of responsibility play in assessing allegation credibility, wefollow the procedures outlined in Baron and Kenny (1986) to test for four mediation conditions with

a set of regression models. Perceived responsibility for the fraud qualifies as a mediator of the

relationship between the type of control weakness and the perceived credibility of an allegation if: (1)

variations in the type of control weakness significantly account for variations in credibility (Beta ¼0.224, t ¼2.08, p ¼ 0.041); (2) variations in the type of control weakness significantly account for variations in perceived responsibility for the fraud (Beta ¼ 0.271, t ¼ 2.55, p ¼ 0.013); (3) variationsin perceived responsibility for the fraud significantly account for variations in credibility (Beta ¼0.224, t ¼2.28, p, 0.025); and (4) the strength and significance of the relationship between thetype of control weakness and the perceived credibility of an allegation is diminished when the

relationships between the type of control weakness and perceived responsibility for the fraud and

between perceived responsibility for the fraud and credibility are controlled (reduced from Beta ¼0.224, t ¼2.08, p ¼ 0.041 to Beta ¼0.170, t ¼1.54, p¼ 0.126). All four conditions are met, andthe results indicate partial mediation. Exploitation of control weaknesses versus circumvention of the

fraud cause different perceptions of personal responsibility for the fraud, and these perceptions of

responsibility influence CAEs’ judgments about the credibility of the allegations.

The final hypothesis, H2b, examines whether CAEs change their allocation of resources to the

investigation of allegations when the allegations indicate higher (exploitation of weaknesses) and

lower (circumvention of controls) levels of responsibility for the alleged fraud. The method of fraud

variable is marginally statistically significant in Panel B of Table 2 (p ¼ 0.089), indicating that themethod of fraud does influence resource allocation. However, the pattern of means indicates that

this influence is not the result of a bias to avoid investigation of allegations that could reveal that theCAE was responsible for the alleged fraud. Rather, CAEs allocated more resources to allegations

involving the exploitation of weaknesses ($77,442) than to allegations involving circumvention of

existing controls ($67,073). It appears that the oversight of CAEs’ decisions and the accountability

they face causes them to expend more resources on allegations that indicate more CAE

responsibility for a fraud, relative to allegations that indicate less responsibility.

CONCLUSIONS

The whistle-blowing provisions of SOX focus on anonymous channels for the reporting of

accounting irregularities and fraud. Research indicates that anonymous allegations are viewed asless credible than are non-anonymous allegations, which can result in dysfunctional effects of

anonymous reporting (Hunton and Rose 2011). A primary factor in the effectiveness of anonymous

and non-anonymous whistle-blowing reports is the reaction of the complaint recipient to the

allegation. The purpose of the present study is to examine CAEs’ handling of anonymous and

non-anonymous whistle-blowing reports where the alleged fraud is perpetrated in different manners

that could create higher or lower levels of CAE responsibility for the fraud.

Results indicate that CAEs judged anonymous whistle-blowing allegations to be less credible

than non-anonymous allegations. CAEs also judged whistle-blowing reports that suggested

wrongdoing was perpetrated by the exploitation of weaknesses in previously evaluated internal

controls to be less credible than those that reported the alleged wrongdoing was accomplished by

the circumvention of internal controls. In essence, we find that CAEs face incentives to perceive

that allegations are untrue when the allegations pose personal threats, and these incentives influence



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indicate that CAEs do not perceive high levels of credibility for any allegation involving controls,

which is worthy of further investigation.

We also find that their perceptions of lower credibility and concerns about being responsible

for an alleged fraud do not translate into smaller allocations of resources to investigating

allegations. Contrary to the findings of Hunton and Rose (2011), where directors chose not to

expend resources on the investigation of allegations that posed personal threats, our CAE

participants made the opposite choice. CAEs allocated more resources to allegations for which they

would be held more responsible. Further, directors in Hunton and Rose (2011) reduced the amount

of resources for investigation the most when there was a combination of anonymity and high

responsibility, but no such interaction is present for CAEs. CAEs appear to act independently from

audit committee members, and CAEs do not avoid investigation of allegations that pose personal

threats, even when the credibility of the allegations may be perceived to be low. Our results suggest

that CAEs are not subject to the same biased processing as are corporate directors, and the increased

accountability of CAEs for their decisions relative to directors could be the primary cause for this

difference.

It is often the case that the audit committee relies on the CAE to investigate whistle-blowingreports (Kaplan and Schultz 2006), and our findings suggest that CAEs may be a better choice for

managing the evaluation of whistle-blowing allegations relative to members of the audit committee.

CAEs’ decisions are not shrouded in secrecy, and CAEs report to both management and the audit

committee, creating multiple levels of accountability. They are less able to ignore allegations that

pose personal threats than are directors. Future research could further address how accountability

for decisions influences the evaluation of whistle-blowing allegations, and determine whether

CAEs’ decisions related to whistle-blowing allegations are less biased than are decisions of other

parties that could be charged with managing whistle-blowing systems.

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Chief Audit Executive & Whistle Blowing

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