Newswise — Firms that were targeted by an employee whistleblower engaged in significantly less financial misreporting and tax aggressiveness for at least two years past the allegation, according to a new study from a University of Iowa researcher.

Jaron Wilde, assistant professor of accounting in the Tippie College of Business, says the study suggests that the evidence suggests whistleblowers can provide an effective deterrent to financial misreporting by corporations.

Wilde’s study looked at 317 large, publicly traded firms that were the target of a whistleblower retaliation complaint made to the Occupational Safety and Health Administration (OSHA) between 2003 and 2010. He then followed up by looking at those firms’ propensity to misreport their financial statements compared with control firms that had similar profiles and were not the subject of a whistleblower complaint that he knew of.

He found firms that were the targets of a complaint engaged in less aggressive financial and tax management practices than firms that were not targeted by a complaint. For instance, the study found whistleblower targets had fewer accounting irregularities, and they engaged in less tax aggressiveness, compared with other firms.

Moreover, those deterrent effects lasted for at least two full years after the whistleblower lodged the complaint, suggesting management was reluctant to push the bounds of what might be expected for a significant length of time.

“A complaint puts management on notice that a whistleblower has come forward, so they know it’s possible they’re going to be looked at more closely by the SEC or other federal regulatory agencies,” Wilde says. “In theory, they react by engaging in less aggressive practices, and the evidence seems to validate that theory.”

In the end, he says whistleblowers, like other monitors, can be beneficial to investors, by increasing the confidence they can place in the integrity of firms’ financial reports.

Wilde’s study, “The Deterrent Effect of Employee Whistleblowing on Firms’ Financial Misreporting and Tax Aggressiveness,” is being published in a forthcoming issue of the Accounting Review.