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Intentions to Report Questionable Acts: An Examination of the Influence of Anonymous Reporting Channel, Internal Audit Quality, and Setting

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Abstract

The Sarbanes–Oxley Act of 2002 requires audit committees of public companies’ boards of directors to install an anonymous reporting channel to assist in deterring and detecting accounting fraud and control weaknesses. While it is generally accepted that the availability of such a reporting channel may reduce the reporting cost of the observer of a questionable act, there is concern that the addition of such a channel may decrease the overall effectiveness compared to a system employing only non-anonymous reporting options. The rationale underlying this concern involves the would-be reporter’s likelihood of reporting, the seriousness with which the organization treats an anonymous report, and the organization’s ability to thoroughly follow-up the report. Thus, we explore the extent to which the availability of an anonymous reporting channel influences intended use of non-anonymous reporting channels. Further, in response to Sarbanes–Oxley and the environment of financial scandals that led to its passage, many firms are strengthening their internal audit departments, and providing them with greater independence from upper management’s direct control. Accordingly, our examination tests whether the intended use of the internal audit department as an internal reporting channel is greater when the internal audit department is of “high” versus “low” quality. Finally, the study investigates intended reporting behavior across three different cases (e.g., settings).

Results show that the existence of an anonymous channel does reduce the likelihood of reporting to non-anonymous channels, that generally the internal audit department quality does not affect reporting to non-anonymous channels, and that case-setting affects the type of channel to be used. Implications from the study are discussed.

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Correspondence to Steven E. Kaplan Jr..

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Steven E. Kaplan is a Professor of Accounting at Arizona State University, where he has been a member of the faculty since 1981. He received his Ph.D. from the University of Illinois. He has published widely in journals such as The Accounting Review, Journal of Accounting Research, Journal of Accounting and Public Policy, Business Ethics Quarterly, and Journal of Business Ethics. He is the previous editor of Behavioral Research in Accounting, a section journal of the American Accounting Association. His primary research interests are behavioral issues, judgment and decision making, and ethics.

Joseph J. Schultz is a Professor of Accountancy in the W.P. Carey School of Business at Arizona State University. Prior to moving to Arizona State in 1983, he was an associate professor at the University of Illinois at Urbana-Champaign. He received his Ph.D. from The University of Texas at Austin. His interest in ethics is long-standing and has published related work in the Journal of Accounting Research and Auditing: A Journal of Practice and Theory. In addition, he has completed related research projects supported by the Institute of Internal Auditors’ Research Foundation and consulted in the area. His other research interests include decision-making in auditing and international accounting.

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Kaplan, S.E., Schultz, J.J. Intentions to Report Questionable Acts: An Examination of the Influence of Anonymous Reporting Channel, Internal Audit Quality, and Setting. J Bus Ethics 71, 109–124 (2007). https://doi.org/10.1007/s10551-006-0021-6

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