Risk Management

Don’t Discount Secondhand Whistleblower Reports

Research shows that reports based on secondhand information are actually more credible than those from firsthand knowledge.
David McCannFebruary 7, 2020
Don’t Discount Secondhand Whistleblower Reports

Which employee whistleblower hotline report would you trust more — one with firsthand knowledge of alleged conduct, from someone who was involved in it or observed it? Or one based on secondhand information, from someone who was told about conduct, overheard it, or accidentally found a document or file?

Many observers would default to reports based on firsthand knowledge. But they would be wrong to do so.

After examining more than 2 million whistleblower reports from more than 1,000 publicly traded U.S. companies, our new study found that secondhand whistleblower reports are almost 50% more likely to be substantiated — in other words, they’re 50% more credible — than firsthand reports.

With organizations around the world increasingly adopting risk management mindsets, this is a crucially important, counterintuitive finding. It should turn the heads of company leaders who might have looked askance at secondhand reporting in the past.

The research is based on anonymized reporting data maintained by NAVEX Global, the world’s largest provider of whistleblower hotline systems. From it, we know that conventional wisdom about the merits of secondhand reporting is off-target, that the game-of-telephone metaphors don’t apply, and that secondhand reports often hold untapped approaches to discover organizational problems, or even prevent problems from happening in the first place.

Why Secondhand Reports Are More Valuable

When we began our research, we weren’t expecting to arrive at these findings for secondhand reports. In fact, we were so surprised when we got the initial results that we ran the data a few times to be sure of what we’d found.

But the findings were clear. Secondhand reports were 47.7% more likely to be substantiated by management than firsthand reports. This flew in the face of conventional and even some scientific thinking (from psychology labs), so our next step was to determine why this might be happening.

We reached out to some chief compliance officers whom we knew were at the top of their professions and whose organizations use integrated compliance and risk management systems. They actually weren’t surprised when we shared our research and pointed to two primary reasons for the greater credibility of secondhand reports.

One reason is that firsthand reports are more likely to be frivolous and are occasionally personally motivated. Secondhand reporters who decide to come forward usually do so after doing a sort of first round of vetting of the situation themselves. In other words, a secondhand reporter is most likely going to say something only if they’re sure about what they’re reporting.

Second, many valid firsthand reports are never made, because those affected sometimes fear retaliation or blowback. This is less of a concern for secondhand reporters — because they aren’t personally as involved, they don’t have as much to lose.

Further Dissecting Firsthand and Secondhand Reports

Our analysis, which covered reports made between 2004 and 2017, found that firsthand reports were more frequently made in person, more frequently involved reports of human resources issues such as harassment and discrimination, and contained more details.

Secondhand reports were more likely related to accounting and financial concerns and business integrity issues.

Firsthand reports were more common; of the reports where a source’s awareness level — i.e., whether they were firsthand or secondhand – could be identified, 44.3% were made by someone directly involved and 20.6% came from a firsthand witness. Just under 15% could be classified as secondhand, from either an employee or someone outside the company.

At first glance, this relative paucity could give already skeptical company leaders more reason to look past secondhand reporting. But our findings showed not only the credibility of the reports, but that they correlated with results that any executive should encourage.

More secondhand reports from employees corresponded to fewer lawsuits and lower legal settlements in the following year. Secondhand reports from individuals outside the organization were negatively associated with the number and dollar amounts of government fines in subsequent years.

We didn’t find the same correlation with firsthand reports.

What Should Companies Take From This? 

After spending the past couple of years digging into whistleblower hotline data, I’ve come away with one conclusion: whistleblowing is the best thing that is never talked about in the right way.

It’s almost always viewed negatively, probably because when the public at large sees something stemming from a whistleblower report, it tends to be associated with a scandal, or at least negative publicity.

But that’s usually because a whistleblower’s initial flagging of the problem got dismissed or ignored, and a larger problem took root and eventually was made public. Either way, the thinking around whistleblowing needs to change.

Recent research has shown that increased internal hotline use correlates with greater profitability and workforce productivity (as measured by return on assets), fewer material lawsuits brought against the company overall (and lower settlement costs if a lawsuit does occur), and fewer external whistleblower reports to regulatory agencies and other authorities.

These findings show that a high volume of reports indicates a healthy organization that effectively encourages communication among its employees. The findings show that old thinking that still exists in too many C-suites and boardrooms — less reporting equals fewer problems — is wrongheaded. And this latest research shows that dismissing secondhand whistleblower reports out of hand falls in the same category.

Given these new lessons, and the financial repercussions that are at stake when it comes to lawsuits, regulatory fines, and bad publicity, boards should seek out more hotline reporting information. And compliance officers should strive to make board members understand the valuable intelligence these reports offer — even when they’re secondhand.

Kyle Welch is an assistant professor of accountancy at The George Washington University School of Business.