Employment screening

The question, “Who blows the whistle on corporate fraud?” is also the title of an article that will be published in the Journal of Finance. To find the answer, the authors studied “all reported fraud cases in large U.S. companies between 1996 and 2004.” Here’s the answer they came up with.

“We find that fraud detection does not rely on standard corporate governance actors (investors, SEC, and auditors), but takes a village, including several non-traditional players (employees, media, and industry regulators).”

That’s good news. It means that you’ve probably got honest employees on the payroll who may spot fraud, even if the government or the board of directors can’t do it.

But there’s also bad news here. Whistle-blowers are a rare breed indeed. Whistle-blowing is an act that takes courage. Many whistle-blowers suffer some kind of reprisal. So for one of your people to catch fraud they have to be honest, placed in a position where they can spot the fraud, able to identify it, and brave enough to bring it to your attention.

And you have no way of knowing how long fraud will go on before it gets caught. It might be only a little while. But it might be years.

So […]