The Effect of Social Confrontation on Individuals’ Intentions to Internally Report Fraud

Abstract

ABSTRACT: Fraudulent activity is often first discovered by employees. Gaining an understanding of how meeting with the transgressor to discuss the apparent fraud (“social confrontation”) influences individuals’ likelihood of reporting fraud to internal recipients is particularly important for various stakeholders interested in the early reporting of fraud. Using an experimental approach, this study provides evidence on the extent to which unsuccessful social confrontation with one’s supervisor regarding apparent fraud influences reporting intentions to two different, but plausible, internal report recipients: the supervisor’s supervisor and an internal auditor. To broaden the generalizability of the findings, the study includes two different fraudulent acts. In the study, participants assume the role of an employee discovering a fraudulent act. The study manipulates two between-participants variables: (1) the presence or absence of unsuccessful social confrontation with the transgressor to discuss the apparent fraud and (2) the type of fraudulent act that apparently occurred (misappropriation of assets or fraudulent financial reporting). The results of the study were consistent with and extend power-related theories of whistleblowing. We find that under unsuccessful social confrontation, one’s reporting intentions to the supervisor’s supervisor are stronger than to an internal auditor. However, reporting intentions to the supervisor’s supervisor are not stronger than to an internal auditor when social confrontation did not occur. The type of fraudulent act did not influence the relation between social confrontation and reporting intentions. Our findings suggest that employees experiencing unsuccessful social confrontation may be more likely to seek out powerful internal report recipients. Thus, audit committees and others with an interest in fostering internal fraud reporting may find it helpful to include social confrontation strategies as part of a broader discussion with employees of responses to the discovery of fraud and make employees fully aware of how to report apparent fraud to senior internal report recipients.