The costs associated with the operation of the False Claims Act are more than offset by the benefits of recovering the damages and deterring fraud, new research by management professor Richard Wokutch shows.
Wokutch says that the legislation, which offers whistle blowers financial rewards for disclosing fraud against the federal government, has raised “interesting ethical issues.”
Critics have raised moral objections to the act (passed in 1863 and amended in 1986), he says, “most notably, that it exerts a morally corrupting influence on whistle-blowers.” The critics contend that altruistic motives are necessary as moral justification for whistle blowing and that the law creates incentives for employees to delay disclosure of fraud to maximize their financial gain.
In a study published recently in the Journal of Business Ethics, Wokutch and co-authors Thomas L. Carson, of Loyola University’s philosophy department, and Mary Ellen Verdu, of Virginia Tech’s Department of Human Development, argue that there are no compelling moral objections to the law and that it should be judged in terms of its economic costs and benefits.
Assessing these, they conclude that the law’s benefits — recovered damages from fraud, protection for whistle blowers, and fraud deterrence — clearly outweigh the costs — including false allegations, prosecuting and defending legitimate claims, and delayed whistle blowing.
The researchers also propose improving the legislation by strengthening protection for whistle blowers from retribution, providing them temporary financial safety nets, and capping awards in ways that provide adequate compensation for whistle blowing without making it “an alluring temptation to gain windfall rewards.”
They also suggest that a similar mechanism be considered for protecting stockholders’ interests in the private sector.
“When corporations are defrauded, stockholders suffer financially," Wokutch says. "When fraud is discovered and damages recovered, the corporation and shareholders gain.”
They note that a few companies, including General Motors and Bloomingdales, already have whistle-blowing rewards programs.
“Whistle-blowers who today choose the traditional route of external disclosure continue to face the prospect of harassment, demotion, firing, black-balling within industries, and significant emotional harm to themselves and their families,” says Wokutch.
The False Claims Amendments Act, he says, appears not only to be a “remarkable remedy” to these problems but also to offer substantial economic benefits for the government and society as a whole.
Wokutch says there is considerable potential for further research, given that many of the discussions and studies about whistle-blowers were conducted in the 1980s.
“The amendments to the False Claims Act," he says, "and the subsequent flood of cases filed under the act provide rich opportunities for researchers to further discuss the purpose, motivations, nature, and consequences of whistle-blowing in this new era.”