Citizen Watch in the Accounting Department? Tax and Financial Reporting Responses to Employee Whistleblowing Allegations

Abstract

This study examines the relation between employee whistleblowing allegations and firms’ subsequent tax and financial reporting behavior. I draw on economic theory to develop expectations for and test firms’ tax and financial reporting responses to whistleblowing reports of corporate financial misconduct. I employ a difference-in-difference research design to test whether firm’s subject to employee whistleblowing allegations related to financial misconduct exhibit significantly less misreporting risk and tax avoidance in the period following the allegations relative to a control group of firms not subject to whistleblowing allegations.

Using a unique sample of whistleblowing cases obtained from the U.S. government, I find that firms subsequently engage in significantly less aggressive financial reporting behavior and have significant increases in their effective tax rates following whistleblowing allegations. This study contributes to the literature by providing evidence on firms’ tax and financial reporting responses to employee whistleblowing and by highlighting the role that employees play in both tax and financial reporting oversight. In light of regulators’ recently heightened emphasis on whistleblower programs, the results of this study should be of interest to regulators, researchers, auditors, and investors.