Accountants in industry are often key to the planning and control processes of their organizations. These accountants may find themselves faced with the dilemma of whether or not to blow the whistle on an organizational wrongdoing. Some people, both inside and outside the profession, would view the accountants' decision to blow the whistle as morally and professionally justifiable; while others would see it as harmful to the employing organization and would advise against doing so.

Whistleblowing, defined as disclosing questionable practices involving the organization or its members may be either internal or external. Internal whistleblowing involves informing relevant organization members about wrongdoing. External whistleblowing involves going outside the organization (e.g., to the media or regulatory agencies) to voice concerns over an organizational wrongdoing. Because of its public nature, external whistleblowing causes the greater amount of turmoil, creating an atmosphere of unpleasantness that may lead to retaliation against the whistleblower.

If the accountant is a member of the AICPA, any of the state CPA societies, or the Institute of Management Accountants (IMA), he or she is provided with guidance on reporting wrongdoing. As a member of any of these professional organizations, the accountant in industry is expected to comply with their codes of ethical conduct. Failure to adhere to the codes of ethical conduct could result in sanctions against the accountant. For example, members of the AICPA in violation of their code of ethical conduct could suffer suspension or expulsion from the organization. According to Donald E. Tidrick in the October 1990 issue of The CPA Journal, during the period 1980-89, 156 expulsions and 80 suspensions resulted from violations of the AICPA Code of Ethical Conduct.

It is important for AICPA members (CPAs) in industry and members of the Institute of Management Accountants (MAs) to know the proper procedures for resolving wrongdoing.

The Accountant's Responsibilities

Illegal acts or other wrongdoings can cause damage to an organization through monetary losses, unwanted media attention, environmental damage, or consumer reaction. In fulfilling their responsibilities to their employers and society, CPAs and MAs should report wrongdoing to appropriate individuals within their organization. The codes of ethical conduct of the AICPA and the IMA require accountants to assume the role of internal whistleblower. Unless the organization has procedures for reporting wrongdoing, the accountant should normally report to his or her immediate supervisor. AICPA and IMA members are, however, strongly discouraged from reporting to external sources.

CPAs as Whistleblowers

When we consider CPAs, we often think of accountants in public practice. While the Code of Professional Conduct of the AICPA addresses many issues directed toward practitioners engaged in public accounting, it is not limited in applicability. In fact, the AICPA's Code of Professional Conduct was adopted to provide guidance and rules for all members - those in public practice, industry, government, and education while in the performance of their professional responsibilities.

The Code states that members should act with integrity, guided by the precept that when members fulfill their responsibility to the public, their clients' and employers' interests are best served. In looking out for the welfare of the public, the CPA will also be acting in the best interest of his or her employer.

Code Rule 301, states that "a member in public practice shall not disclose any confidential client information without the specific consent of the client." If we view Rule 301 from the perspective of a "member in industry" rather than a "member in public practice" and replace "client" with "employer," it could be concluded that the CPA should not disclose information about the employing organization without specific consent of management. Rule 301, therefore, requires the CPA in industry to report wrongdoing to the proper level of management within the organization. When reporting wrongdoing, the CPA in industry should first follow the whistleblowing procedures outlined by the employer organization. If the CPA is unable to reach a satisfactory resolution using internal procedures, the next step would be to follow the chain of command beginning with the CPA's immediate supervisor. This process would continue until all internal sources of review are exhausted.

Although Rule 301 does not strictly prohibit the CPA from reporting to external sources, it does make it virtually impossible for the CPA to do so. Rule 301 states that members should not disclose confidential information without the specific consent of the client. If the CPA in industry is to report to an external source, consent must be given by the employing organization. If the employing organization is unwilling to resolve the conflict internally, it is unlikely that the CPA will be granted consent to report to an external source. If the CPA is unable to reach a satisfactory resolution through internal means, the recommended course of action would be to seek legal advice and resign from the organization.

MAs as Whistleblowers

MAs have an obligation to the organizations they serve, their profession, the public, and themselves. The IMA, in its Standards of Ethical Conduct for Management Accountants, states that: "Management accountants have a responsibility to refrain from disclosing confidential information .... to communicate unfavorable information..., and to disclose all relevant information..." Therefore, when the MA is faced with a wrongdoing, the IMA's code of ethical conduct states that the MA has a responsibility to communicate this information. This responsibility to communicate unfavorable information can be interpreted as a responsibility for the MA to act as a whistleblower. When reporting wrongdoing, the IMA takes the position that its members should follow the established policies of the employing organization. If the organization's policies do not resolve the conflict, the MA should then follow the IMA's prescribed course of action. The IMA's Standards of Ethical Conduct advises the MA to report wrongdoing through the proper channels within the organization. If after exhausting all possible internal sources the MA is unable to resolve the conflict, he or she may have to disassociate from the organization. The IMA' s code specifically states that members should not communicate such problems to outside sources. Therefore, like CPAs, MAs are expected, when appropriate, to be internal whistleblowers.

The Study

Having determined the accountant's role with regard to whistleblowing, are accountants themselves willing to react accordingly? Additionally, are they more likely to blow the whistle internally or externally?

To answer these questions, a survey designed to measure internal and external whistleblowing intentions was mailed to a sample of accountants in industry. The participants were presented with 14 wrongdoings (Exhibit 1) and were asked to indicate the probability of their reporting each of the events to either internal or external sources. Whistleblowing intentions were measured using a seven-point scale with responses ranging from 1.0 (highly improbable) to 7.0 (highly probable).

A sample of 800 accountants in industry was taken from the membership roster of the AICPA and the IMA. Of the 800 mailed questionnaires, 244 were completed and returned, resulting in a response rate of 31%. The average age of the respondents was 34 years: the respondents were predominantly male (75%) and married (75%). Respondents had been in the employ of their present firms for an average of nine years and had been working in their current positions an average of four years. The majority of the respondents were working in either financial or managerial accounting (64%). Approximately 87% of the respondents were familiar with the codes of ethical conduct.

Internal Whistleblowing Intentions

Exhibit 2 summarizes the responses to the questions regarding internal whistle-blowing intentions in order of perceived importance. The average probability of reporting the 14 items to internal sources was 5.95. This indicates a high probability that accountants in industry are willing to report wrongdoing to internal sources. The highest score was for item 1, the probability of reporting employees stealing organization funds or property. The average score for this item was 6.41. The respondents indicated the lowest probability (5.41), of reporting management making overly optimistic and false projections of future performance.

Exhibit 2 also discloses that the accountants in this study were most concerned with reporting wrongdoing involving theft of organization funds, followed by wrongdoing involving acts that could possibly cause injury to employees or the public. The respondents seemed to be least concerned with management making overly optimistic projections and with wrongdoing involving waste of organizational assets.

Overall, the results of this study suggest that AICPA and IMA members in industry are aware of the fact that they should report wrongdoing to internal sources and are willing to do so.

External Whistleblowing Intentions

When asked whether they would report wrongdoing to external sources, respondents indicated a lower probability of doing so (Exhibit 3). The average external whistleblowing score for the 14 items was 3.03. This indicates that the accountants tend to be in compliance with the codes of conduct of the AICPA and IMA which strongly discourage members from reporting to external sources. They were, however, most likely to report to external sources management permitting development or production of unsafe products and least likely to report waste caused by the purchase of unnecessary or deficient goods or services. This may indicate that the decision to report to external sources may be dependent on the situation - some wrongdoings should be reported and others should not. For example, the production of unsafe products could result in ramifications affecting society as well as the organization. In fulfilling their responsibilities to the general public, it may become necessary to report certain wrongdoing externally.

Michael Chiasson, DBA is associated with Nichols State University and Gene H. Johnson, PhD, CPA, CMA, and J. Ralph Byington, PhD, CPA, are both associated with Louisiana Tech University.

RELATED ARTICLE: LIABILITY REFORM LEGISLATION AND WHISTLEBLOWING

The accompanying article indicates that both the AICPA Code of Conduct and the IMA Standards of Ethical Conduct lead the CPA/MA in industry to conclude that it is inappropriate, except where legally prescribed, to inform persons outside the organization of unethical behavior encountered within his or her employer organization. Both codes suggest that the accountant should inform persons at managerial levels higher than that at which the unethical or illegal behavior occurred. If the matter is not resolved to the accountant's satisfaction, he or she is obligated to continue submitting the matter to higher and higher levels of managerial authority until it is satisfactorily resolved. This could lead to submitting the matter to the audit committee, board of directors, or owners of the organization. If the matter is not satisfactorily resolved, the accountant's remaining choice is to resign from the organization. In this latter case, the IMA standards call for the accountant to write an informative memorandum on the issue to an appropriate representative of the organization.

Until recently the AICPA was opposed to any requirement for the CPA to inform those outside an organization of illegal acts or unethical behavior. However, the AICPA has since endorsed provisions in proposed Federal legislation that would institute the requirement for auditors of public companies under certain circumstances to report to the SEC financial fraud discovered in an audit engagement. Those circumstances generally relate to instances where a public company fails to take appropriate remedial action with respect to an illegal act that has a material effect on the Financial statements of the company. In return for the requirement the auditor would be shielded from private liability for the contents of any such report to the SEC. In the event such legislation is passed, it can only be speculated as to what effect it will have on the CPA employed by the organization that has failed to respond to the knowledge of an illegal act of the type contemplated in the legislation. Would the employee CPA have any responsibility to inform the SEC?

EXHIBIT 1 WHISTLEBLOWING INTENTIONS

The Fourteen Wrongdoings

1. Employees stealing organization funds and/or properly.

2. Employees accepting bribes or kickbacks.

3. Employees abusing their official position to obtain substantial personal services of favors.

4. Employees giving unfair advantage to a contractor, consultant, or vendor.

5. Employees creating or tolerating a situation that poses a danger to public health or safety.

6. Management permitting development or production of unsafe products.

7. Management permitting development or production of products not in compliance with government regulations.

8. Management covering up poor performance, whether financial figures or non-financial figures.

9. Management making overly optimistic and false projections of future performance.

10. Management permitting working conditions that could endanger the safety of or cause physical harm to employees.

11. Employees creating or tolerating unsafe working conditions.

12. Waste of organizational assets caused by inappropriate parties receiving money, goods, or services.

13. Waste caused by the purchase of unnecessary or deficient goods or services.

14. Waste of organizational assets caused by poorly managed organizational operations.

EXHIBIT2

INTERNALWHISTLEBLOWINGINTENTIONSRANKINGOFRESPONSES

Item*Whistleblowing

Probability

1.Employeesstealing6.41

2.Employeesacceptingbribes6.40

5.Dangertopublic6.30

10.Unsafeworkingconditions

(bymanagement)6.28

11.Unsafeworkingconditions

(byemployees)6.20

6.Unsafeproducts5.93

12.Divertedmoneyorgoods5.91

7.Noncompliance-

governmentregulations5.82

8.Poorperformance(management)5.82

4.Unfairadvantagetocontractors5.73

13.Unnecessarypurchases5.72

3.Employeesabusingpositions5.70

14.Poorlymanagedoperations5.66

9.Overlyoptimisticandfalseprojections5.41

Overallresponseaverage5.95

Responses

(1=highlyimprobablyand7=highlyprobably)

*forcompletequestionsseeExhibit1

EXHIBIT3

EXTERNALWHISTLEBLOWINGINTENTIONSRANKINGOFRESPONSES

Item(*)Whistleblowing

Probability

6.Unsafeproducts3.87

10.Unsafeworkingconditions

(bymanagement)3.85

5.Dangertopublic3.62

7.Noncompliance-

governmentregulations3.47

11.Unsafeworkingconditions

(byemployees)3.40

1.Employeesstealing3.07

2.Employeesacceptingbribes3.07

8.Poorperformance(management)2.92

12.Divertedmoneyorgoods2.65

3.Employeesabusingpositions2.61

9.Overlyoptimisticandfalseprojections2.61

4.Unfairadvantagetocontractors2.59

14.Poorlymanagedoperations2.41

13.Unnecessarypurchases2.39

Overallresponseaverage3.03

Responses

(1=highlyimprobableand7=highlyprobable)

*forcompletequestionsseeExhibit1