Print
E-MailJonas Heese is Assistant Professor of Business Administration in the Accounting & Management Unit at Harvard Business School; Ranjani Krishnan is the Ernest W. & Robert W. Schaberg Endowed Chair in Accounting at Michigan State University; and Hari Ramasubramanian is a Doctoral Student at Michigan State University. This post is based on their recent paper, forthcoming in the Journal of Accounting and Economics.
Regulatory agencies in the United States rely on the assistance of whistleblowers to detect corporate fraud. The Department of Justice (DOJ) acts as a gatekeeper, evaluating whistleblower allegations to separate legitimate from frivolous cases. Despite its pivotal role in corporate fraud enforcement, there is sparse evidence on how the DOJ exercises its gatekeeping authority. Also, little research examines the consequences of DOJ oversight in such whistleblower cases. In our paper, we examine the DOJ’s gatekeeping role in the context of whistleblowing lawsuits against firms that are alleged to have defrauded the government.
Public and Private Enforcement
A growing debate around fraud enforcement involves the efficacy of public versus private enforcement mechanisms. At one end of the spectrum is a total private enforcement mechanism where whistleblowers provide fraud control with minimal participation from public agencies. At the other end of the spectrum is a public enforcement mechanism that vests all oversight with agencies. In the middle of the continuum is a mixed regime of a private-public partnership, such as whistleblower-initiated lawsuits under the False Claims Act (FCA) against firms that defraud the U.S. government. These mixed regimes have become prevalent in a range of contexts including securities regulations. Our study sheds light on the debate regarding the efficacy of public versus private enforcement mechanisms.
DOJ’s Role in FCA Whistleblower Cases
The FCA whistleblower regime is critical in combatting corporate fraud against the government. Approximately 12,000 lawsuits were filed under the FCA and over $50 billion was obtained in recoveries between 2000 and 2018. Once a whistleblower files a lawsuit, it is placed under seal and the DOJ’s Civil Fraud Division investigates the case. The DOJ has the power to dismiss, intervene in, or decline a case. Dismissal implies that the case is terminated, and the whistleblower cannot pursue the case on its own. Intervention implies that the DOJ takes over the litigation of the case, but the whistleblower obtains a share of the monetary proceeds. Decline implies that the DOJ does not participate, but the whistleblower is free to pursue the case on its own. Historically, approximately 90% of DOJ-intervened cases have resulted in settlements. In cases where the DOJ declined and the whistleblower pursued the case, only 6.8% have resulted in settlements.
Overview of Our Study
The mission of the DOJ is to curtail fraud by enforcing the law. To that end, the DOJ’s performance assessment and budgetary allocations from the U.S. Congress are affected by the percentage of cases won and the recovery rate of monetary proceeds. We study the entire population of whistleblower allegations brought under the FCA and thereby identify the pool of potential enforcement targets of the DOJ. Our first analysis examines DOJ intervention into whistleblower cases as a function of factors that affect the likelihood of victory and the extent of monetary proceeds. Our second analysis examines the DOJ’s investigative efforts to build a strong case to increase its likelihood of victory. We use investigation length as the effort measure. Our third analysis studies the consequences of DOJ intervention for firms, whistleblowers, and the overall fraud environment. We assess whether DOJ intervention is associated with changes in firms’ control systems and the overall level of whistleblowing activity in the economy. Finally, we examine the relative deterrent effects of public enforcement through DOJ intervention versus private enforcement by whistleblowers acting alone.
Results of Our Study
We analyze 554 whistleblower allegations against publicly listed firms from 2002 to 2012. Results indicate that both the DOJ’s likelihood of intervention and investigation length are influenced by the prospect of victory and the amount of monetary proceeds likely to be recovered from the case. Specifically, the DOJ is more likely to intervene in and conduct longer investigations of whistleblower cases when it has more resources (such as cases involving a federal agency that dedicates more resources to fraud enforcement), and where it has higher expected recovery of monetary proceeds (such as defendant firms with higher liquidity or profitability). The DOJ is less likely to intervene in cases with a lower likelihood of victory (such as cases involving target firms that are important suppliers to the allegedly defrauded agency, have greater market power, or have complex operations). We find that investigations are shorter when the target firm is a powerful defendant (evidenced by its political contributions, or market power).
Next, we investigate the consequences of DOJ intervention for the design of firms’ control systems. We compare outcomes for firms with whistleblower cases that were intervened by the DOJ and those with whistleblower cases that were not intervened by the DOJ. We find that firms subject to DOJ intervention improve their internal controls, employee relations, and board independence. Firms that experienced DOJ intervention had lower future whistleblowing compared to firms that did not experience DOJ intervention. For the aggregate fraud environment, we find that whistleblowers avoid filing lawsuits with district courts or against federal agencies with low DOJ intervention rates. Finally, we find evidence that DOJ intervention is relatively more effective in reducing the likelihood of future fraud and improving the fraud control environment than whistleblowers acting alone, suggesting that public enforcement has a greater deterrent effect on fraud than private enforcement.
Conclusion
Our study provides insights into how the DOJ exercises its gatekeeper role in the context of the FCA whistleblower regime. The efficacy of the whistleblower program hinges on the actions of the litigating arm of regulators, namely the DOJ, and hence our study has implications for other whistleblowing regimes. DOJ intervention reduces future fraud and encourages whistleblowers to come forward. Finally, our study sheds light on the debate regarding the efficacy of public versus private enforcement mechanisms.
The full paper is available for download here.
