BEHAVIORAL RESEARCH IN ACCOUNTING

Vol. 24, No. 2

2012
pp. 8799

American Accounting Association

DOI: 10.2308/bria-50154

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 the
circumvention 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

ection 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 Bucknell
University for their valuable comments and suggestions.

Published Online: March 2012

87

88

Guthrie, Norman, and Rose

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 whistleblowing 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 more
accountability 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 organizations 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 to
examine 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 CAEs reputation. Our findings should be of interest to
boards of directors, audit committees, and senior management who are accountable to investors and
other parties for the timely and unbiased examination of whistle-blowing allegations.
Behavioral Research In Accounting
Volume 24, Number 2, 2012

Chief Audit Executives Evaluations of Whistle-Blowing Allegations

89

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 SOX
specifically 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 whistleblowing 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 to
perceptions 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 donamely, the implementation of
organizational change. In one of their analyses of the 1980 U.S. Merit Systems Protection Board
data (n 8,587), Near and Miceli (1985) found that 80 percent of respondents chose efficacy as one
of 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-blowers 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
following hypothesis:
Behavioral Research In Accounting
Volume 24, Number 2, 2012

Guthrie, Norman, and Rose

90

H1a: CAEs will perceive anonymous whistle-blowing allegations to be less credible than nonanonymous 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 to
investigate an allegation. Although anonymous reports may require more resources than nonanonymous 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-blowing
allegations 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 otherwise
honest 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
situation further aids in the justification of such information processing biases.
Behavioral Research In Accounting
Volume 24, Number 2, 2012

Chief Audit Executives Evaluations of Whistle-Blowing Allegations

91

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 from
subconscious 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 decisionmaking 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 ones 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, the
need 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
change the allocation of resources to the investigation of whistle-blowing allegations.
Behavioral Research In Accounting
Volume 24, Number 2, 2012

Guthrie, Norman, and Rose

92

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 perform
internal 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 companys 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 whistleblowing report was received, which alleged that senior managers had materially overstated earnings
in 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 2 3 2 between-participant design. The first manipulated condition
is report source, either anonymous or non-anonymous. Although a primary purpose of the whistleblowing 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
anonymous or non-anonymous.
Behavioral Research In Accounting
Volume 24, Number 2, 2012

Chief Audit Executives Evaluations of Whistle-Blowing Allegations

93

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 had
previously 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
Moderately
Completely
Credible
Credible
Credible
at All
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 years budget and that no other whistle-blowing reports
will be investigated this year. Any funds that you do not use to investigate the whistleblowing 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 years whistle-blowing budget that you would allocate
toward investigating this whistle-blowing report. Please enter the amount on the line
below: $_______________________________
Behavioral Research In Accounting
Volume 24, Number 2, 2012

Guthrie, Norman, and Rose

94

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
Moderately
Extremely
Responsible
Responsible
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 Would
I Would
I Would
Feel
Feel
Not Feel
Moderately
Completely
At All
Responsible
Responsible
Responsible
Participants indicated that they believed internal audit was more responsible (p 0.005) when the
fraud involved exploitation of a control weakness (mean 40.4 percent) than when the fraud
involved circumvention of a control (mean 22.9 percent). Participants also perceived more
personal responsibility (p 0.023) when the fraud involved exploitation of a control weakness
(mean 39.8 percent) than when the fraud involved circumvention of a control (mean 27.1
percent). 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
credibility assessments across treatment conditions. Panel B shows the results of the ANOVA. The
Behavioral Research In Accounting
Volume 24, Number 2, 2012

Chief Audit Executives Evaluations of Whistle-Blowing Allegations

95

TABLE 1
Credibility of Whistle-Blowing Allegation
Panel A: Mean (Standard Deviation) fSample Sizeg across Treatment Conditions
Report Source
Anonymous

Non-Anonymous

Main Effect:
Method of Fraud

0.475
(0.155)
f20g
0.420
(0.204)
f20g
0.448
(0.181)
f40g

0.581
(0.160)
f21g
0.474
(0.174)
f23g
0.525
(0.174)
f44g

0.529
(0.165)
f41g
0.449
(0.188)
f43g
0.488
(0.181)
f84g

Method of Fraud
Circumvention

Exploitation

Main Effect: Report Source

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

Panel B: ANOVA
Source
Report Source
Method of Fraud
Source 3 Method
Error
Total

Type III
Sum of Squares

df

Mean Square

Sig.

0.134
0.137
0.014
2.426
22.708

1
1
1
80
83

0.134
0.137
0.014
0.030

4.410
4.530
0.467

0.039
0.036
0.496

variable for report source is statistically significant (F 4.410, p 0.039). The pattern of means in
Panel A indicates that credibility assessments are lower for anonymous reports (0.448) relative to
non-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
1
2

We also test H1a with an alternative measure of allegation credibility and find the same pattern of results with
similar levels of statistical significance.
A preliminary ANOVA that included the demographic variables as covariates indicated that CAEs allocated
significantly more resources to all allegations than did deputy CAEs, and we retained this variable as a covariate
in our ANOVA model used for statistical testing.

Behavioral Research In Accounting

Volume 24, Number 2, 2012

Guthrie, Norman, and Rose

96

TABLE 2
Allocation of Resources to the Investigation of the Whistle-Blowing Allegation
Panel A: Mean (Standard Deviation) fSample Sizeg across Treatment Conditions
Report Source

Method of Fraud
Circumvention

Exploitation

Main Effect: Report Source

Anonymous

Non-Anonymous

Main Effect:
Method of Fraud

63,000
(26,576)
f20g
78,250
(28,941)
f20g
70,625
(28,492)
f40g

70,952
(28,400)
f21g
76,739
(28,668)
f23g
73,977
(28,358)
f44g

67,073
(27,477)
f41g
77,442
(28,460)
f43g
72,381
(28,300)
f84g

Cell means represent the dollar amount of resources allocated to the investigation of the whistle-blowing allegation based
upon the following question: 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 years budget and that no
other whistle-blowing reports will be investigated this year. Any funds that you do not use to investigate the whistleblowing 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 years whistle-blowing budget that you would allocate toward
investigating this whistle-blowing report. Please enter the amount on the line below.
Method of Fraud circumvention of internal controls or exploitation of substantial weaknesses in internal controls.
Report Source an anonymous source or a non-anonymous source for the whistle-blowing allegation.

Panel B: ANOVA
Source
Report Source
Method of Fraud
Source 3 Method
CAE or Deputy
Error
Total

Type III
Sum of Squares

df

Mean Square

Sig.

45,948,241
1.869E10
1.040E9
1.369E10
4.896E10
5.066E11

1
1
1
1
79
84

45,948,241
1.869E10
1.040E9
1.369E10
4.896E10

0.073
2.961
1.649
21.690

0.788
0.089
0.203
0.000

significant (F 0.073, p 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
part of the CAE. The method of fraud variable is statistically significant in Panel B (F 4.53, p
Behavioral Research In Accounting
Volume 24, Number 2, 2012

Chief Audit Executives Evaluations of Whistle-Blowing Allegations

97

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, we
follow 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
0.224, t 2.08, p 0.041); (2) variations in the type of control weakness significantly account for
variations in perceived responsibility for the fraud (Beta 0.271, t 2.55, p 0.013); (3) variations
in perceived responsibility for the fraud significantly account for variations in credibility (Beta
0.224, t 2.28, p , 0.025); and (4) the strength and significance of the relationship between the
type 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
0.224, t 2.08, p 0.041 to Beta 0.170, t 1.54, p 0.126). All four conditions are met, and
the 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 0.089), indicating that the
method 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 the
CAE 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 as
less 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
judgment. In all treatment conditions, CAEs find the allegations only moderately credible. This may
Behavioral Research In Accounting
Volume 24, Number 2, 2012

Guthrie, Norman, and Rose

98

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-blowing
reports (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.

REFERENCES
Baron, R., and D. Kenney. 1986. The moderator-mediator variable distinction in social psychological
research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social
Psychology 51 (6): 11731182.
Bloom, R., C. Luchs, and M. Myring. 2009. Whats ahead for internal auditors? Strategic Finance 91 (3):
4652.
Boiney, L., J. Kennedy, and P. Nye. 1997. Instrumental bias in motivated reasoning: More when more is
needed. Organizational Behavior and Human Decision Processes 72 (1): 124.
Bowen, R., A. Call, and S. Rajgopal. 2010. Whistle-blowing: Target firm characteristics and economic
consequences. The Accounting Review 85 (4): 12391271.
Brownstein, A. 2003. Biased predecision processing. Psychological Bulletin 129 (4): 545568.
Hunton, J., and J. Rose. 2011. Effects of anonymous whistle-blowing and perceived reputation threats on
investigations of whistle-blowing allegations by audit committee members. Journal of Management
Studies 48: 7598.
Institute of Internal Auditors (IIA). 2004. Internal Auditings Role in Sections 302 and 404 of the SarbanesOxley Act of 2002. Altamonte Springs, FL: IIA.
Institute of Internal Auditors (IIA). 2000. Code of Ethics. Available at: https://na.theiia.org/
standards-guidance/mandatory-guidance/pages/code-of-ethics.aspx
Kaplan, S., and J. Schultz. 2006. The Role of Internal Audit in Sensitive Communications. Altamonte
Springs, FL: Institute of Internal Auditors Research Foundation.
Kunda, Z. 1990. The case for motivated reasoning. Psychological Bulletin 108 (3): 480498.
Lundin, E. 2009. Delivering audit value. Internal Auditor 66 (4): 1819.
Near, J., and M. Miceli. 1985. Organizational dissidence: The case of whistle-blowing. Journal of Business
Ethics 4: 116.
Behavioral Research In Accounting
Volume 24, Number 2, 2012

Chief Audit Executives Evaluations of Whistle-Blowing Allegations

99

Near, J., and M. Miceli. 1995. Effective whistle-blowing. The Academy of Management Review 20 (3):
679708.
Norman, C., J. Rose, and I. Suh. 2011. The effects of disclosure type and audit committee expertise on chief
audit executives tolerance for financial misstatements. Accounting, Organizations, and Society 36
(2): 102108.
PricewaterhouseCoopers. 2007. Internal Audit 2012. Available at: http://www.pwc.com/us/en/
internal-audit/assets/pwc_ias_2012.pdf
Pyszczynski, T., and J. Greenberg. 1987. Toward an integration of cognitive and motivational perspectives
on social inference: A biased hypothesis-testing model. Advances in Experimental Social Psychology
20: 297340.
Pyszczynski, T., J. Greenberg, and K. Holt. 1985. Maintaining consistency between self-serving and
available data: A bias information processing evaluation. Personality and Social Psychology Journal
11 (2): 179190.
Rains, S. 2007. The impact of anonymity on perceptions of source credibility and influence in computermediated group communication: A test of two competing hypotheses. Communications Research 34
(1): 100125.
Read, W., and D. Rama. 2003. Whistle-blowing to internal auditors. Managerial Auditing Journal 18 (5):
354362.
Sanitioso, R., and Z. Kunda. 1991. Ducking the collection of costly evidence: Motivated use of statistical
heuristics. Journal of Behavioral Decision Making 4: 161178.
Security Executive Council. 2007. Corporate governance and compliance hotline benchmarking report.
Available at: http://www.tnwinc.com/downloads/2007ComplianceBenchmarkReport.pdf
Simonson, I., and P. Nye. 1992. The effect of accountability on susceptibility to decision errors.
Organizational Behavior and Human Decision Processes 51: 416446.
Tetlock, P. E., and J. Lerner. 1999. The social contingency model: Identifying empirical and normative
boundary conditions on the error-and-bias portrait of human nature. In Dual Process Models in Social
Psychology, edited by S. Chaiken, and Y. Trope. New York, NY: Guilford Press.
U.S. House of Representatives. 2002. The Sarbanes-Oxley Act of 2002. Public Law 107-204 [H. R. 3763].
Washington, D.C.: Government Printing Office.

Behavioral Research In Accounting

Volume 24, Number 2, 2012

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.