New Evidence Shows the Efficiency and Benefits of Using an Internal Compliance Hotline System

(April 4, 2019):  In December of 2018 a study was conducted by Kyle Wench (George Washington University) and Stephen Stubben (University of Utah) to examine the use and extent of internal whistleblower hotline systems within publicly traded organizations. This study was the first of its kind. This kind of study had never before been conducted in the academic field. Their goal was to “… provide the first empirical examination in the academic literature of the determinants of outcomes associated with the use of internal whistleblowing systems”.[1] While all publicly traded companies are required by the 2002 Sarbanes-Oxley Act to employ an internal reporting system (such as a “Compliance Hotline”), whether this internal whistleblower hotline is really used or just there to fulfill the requirement was not fully known prior to this study.

I. Overview of this Landmark Hotline Study:

Wench and Stubben’s study was conducted by examining proprietary data derived from over 1.2 million internal whistleblower hotline reports filed within over 900 publicly traded firms inside the U.S. to “provide the first empirical examination in the academic literature of the determinants of and outcomes associated with the use of internal whistleblower hotline systems.” This study led them to want to answer two main questions. The first being, what firms are likely to actively use and internal whistleblower hotline system. The second being what the correlation was between the use of an internal whistleblower hotline and concomitant litigation.

This study used information and reports from a third-party internal whistleblower system. They examined a small amount of reports from hundreds of organizations and assessed a few aspects of each report. Those aspects being when the report was filed, who received the report, the type of complaint (whether it was harassment, unethical business practices, theft, or financial reporting issues) and finally the amount of times the report was accessed and viewed in the system.

II. What is an Internal Whistleblower Hotline System?

An internal whistleblower system is a method of reporting misconduct and fraud within an organization while remaining anonymous. This should be compared to the traditional way of reporting and monitoring which is usually external and involves a corresponding government agency. By having an internal whistleblower hotline, an organization provides its employees with a secure platform for reporting issues and allows those in management to become aware of problems quicker than they traditionally would have issues identifying. There are many different forms of internal whistleblower hotline but the most common and efficient is the ComplianceHotline.

Having an internal whistleblower hotline might be required in many cases, especially for a publicly traded organization, but its benefits also are what drives many organizations to establish one. Without an internal whistleblower hotline, employees may not choose to report fraud or misconduct to management for a number of reasons, the most important being the lack of anonymity. This can lead an employee to reporting fraud or misconduct to an external third party such as a government agency or even worse, not reporting the fraud or misconduct at all which can lead to much larger issues down the road. However, when it is reported to an internal whistleblowing system, management can address the issue that was reported and resolve it early before it becomes too large to manage or attracts the attention of a government agency.

III. Why Use a Compliance Hotline?

Compliance Hotlines are consistently chosen as the preferred method of internal whistleblowing. Unlike the traditional system of reporting issues to human resources or management, a compliance hotline protects the whistleblower. By having the choice to report something anonymously, the whistleblower can remain anonymous. With traditional methods of reporting misconduct, employees run the risk of retaliation which might include being reprimanded from their superiors, being judged and looked down upon by their peers and colleagues, and in some instances, losing their jobs. By placing an anonymous call to a third party internal compliance hotline, you can guarantee that the reported incident or misconduct is being directed to the appropriate parties and that it is dealt with promptly.

IV. Reporting System / Compliance Hotline Findings:

The findings done with this study have been groundbreaking to say the least. Wench and Stubben first noticed that there was a large variation in how different organizations actually used their whistleblowing systems. They found that over time there was an overall increase in the use of whistleblowing systems and more specifically that while larger organizations had more reports, the companies that used their internal whistleblower hotline the most were more profitable, older, and had fewer employees. [1]They also note that companies that are growing at a rapid rate were less likely to use an internal whistleblower hotline.

Wench and Stubben also found that companies with a greater amount of discretionary accruals did not use their internal whistleblowing systems compared to their counterparts. This could possibly be a reflection that more consistently used whistleblower hotline aids in the prevention of earnings management or that the companies that manage earnings choose to not promote or use their internal whistleblower hotline. “In addition, firms with stronger internal controls are more likely to actively use their internal whistleblowing systems. Finally, based on a subset of our sample in the S&P 1500, we find that firms with weaker corporate governance, as captured by the Bebchuk, Cohen and Ferrell (2009) entrenchment index, are less likely to actively use their internal whistleblowing systems.” [2]

Further, they discovered that organizations that had more active use of their internal whistleblower hotlines had consistently fewer material lawsuits filed against their organizations and significantly smaller settlement amounts. In a 3-year span, the found that with “a one standard deviation increase in the use of an internal whistleblowing system is associated with 6.7% fewer pending lawsuits and 21.1% less in aggregate settlement amounts.”[3]

While an increase in internal whistleblowing systems is associated with improved litigation results. With an internal whistleblowing system functioning as a tool for discovering and resolving issues before they become too large or costly, organizations that have them established and used are finding themselves in a much better position than organizations that don’t.

V. How Can You Effectively Employ a Compliance Hotline?

Overall the results showed that having an internal whistleblower hotline saved organizations from external whistleblowing which results in saving money over litigation and also creates a culture based on ethical
responsibility. Through the findings in this study, Kyle Wench and Stephen Stubben were able to conclude that the involvement of an outside whistleblower hotline (ex. OIG, DOJ, SEC etc.) was associated with huge penalties resulting from investigations brought up by tips to these hotlines while internal whistleblower hotlines made these issues significantly easier and less expensive to deal with. By using an internal whistleblower hotline like the Compliance Hotline, an organization can save themselves millions by lowering the risks of misconduct, fraud, and reports of unethical business practices reaching government agencies. 

VI. Final Thoughts

Having an internal whistleblower hotline isn’t always easy to setup and manage. The most advantageous solution for these situations is an internal whistleblowing system that is available 24×7 that is confidential, anonymous and managed by a third party like www.ComplianceHotline.com

The use of an effective compliance hotline can better ensure complainant anonymity and confidentiality. Sometimes employees are scared for their jobs to report misconduct or unethical business practices straight within their organization so a third-party managed internal whistleblowing system usually gives these employees the comfort they need to be able to report these issues. The folks at ComplianceHotline.comare used to working with large profile clients as well as smaller organizations and help them meet their compliance needs. Our hotline is completely confidential and has helped organizations avoid costly litigation and helped their clients feel safe and comfortable in their work atmosphere knowing that incident reporting is as easier as a phone call or opening a new tab on their web browser.

For a free consolation, or fill out the form below. Click here for more information about Compliance Hotline.

[1] Stubben, Stephen and Welch, Kyle T., Evidence on the Use and Efficacy of Internal Whistleblowing Systems (December 1, 2018).

[2]Stubben

[3]Stubben, Stephen and Welch, Kyle T., Evidence on the Use and Efficacy of Internal Whistleblowing Systems (December 1, 2018).

[4]Stubben,