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Whistleblowers: Incentives, Disincentives, and Protection Strategies by Frederick D. Lipman

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Chapter Seven

Establishing a Robust Whistleblower System

THIS CHAPTER DESCRIBES a robust whistleblower system. Such a system should be adopted not only by public companies but by all organizations of any significant size, including not-for-profit organizations and government entities. Indeed, Internal Revenue Service (IRS) Form 990 (Part VI, Line 13) for tax-exempt organizations specifically asks whether the organization has a “written whistleblower policy.” Even smaller organizations should adopt a robust whistleblower system, but they may tailor the system recommended in this chapter to their size.

The object of a robust whistleblower system is to encourage legitimate whistleblowers to provide valuable information to the board of directors (or other controlling group) of the organization, which is not being supplied to the directors by the chief executive officer (CEO) or chief financial officer (CFO) or through the internal auditor or the independent auditor. This information can help the organization prevent or cease illegal activities and identify major risks that it may incur. Whistleblower information permits the board of directors (or other controlling group) of an organization to more effectively fulfill their fiduciary obligations to the organization.

Many organizations, particularly public companies, have installed employee hotlines that are used only occasionally. Independent directors may incorrectly assume that the lack of employee hotline usage is an indication ...

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