What happens when frauds are outed because of whistleblowing?

Ashwin Malshe:

I would like to bring to your attention a recent controversy in accounting research. It relates to how extreme values may drive results in observational studies. However, this issue is more complex in this specific case because the event (corporate whistleblowing) is rather rare, showing up only about 20% of the time in the sample.

The background is that a paper published by Call et al. (2018) in the Journal of Accounting Research (JAR), an elite journal in accounting, showed that when frauds are outed because of whistleblowing, the penalties on average are higher. Because the data are publicly available from the journal, another researcher, Kuvvet (2019), tried to replicate the paper by eliminating the top 11 (less than 1% of the sample) firms with highest penalties. It seems that the results go away and reverse in some models! The original authors respond to this but in an inadequate fashion (in my opinion). The elimination of top 1% firms by penalties results in removal of about 4%-5% firms with whistleblowing event. It seems that this is a concern about the replication among some of my accounting colleagues who I spoke with. However, there is no consensus about a solution.

The replication paper was rejected in JAR, which additionally highlights a problem you posted on your blog previously.

The original paper by Call et al. 2018 (Whistleblowers and Outcomes of Financial Misrepresentation Enforcement Actions).
The replication by Kuvvet 2019.
Call et al.’s comment on replication.

I don’t really have the energy to look into this one but I thought I’d post for those who might be interested.

P.S. I was going give this post the title, “A recent controversy in accounting research,” but I thought that would be too boring even for this blog (recall P.S. here).