Whistleblowing is one of the most consequential pressure valves in corporate governance, and a new peer reviewed article shows that what happens inside the audit committee can determine whether concerns are resolved internally or pushed outside the firm. In Gladys Lee’s “Audit committee financial expertise, equity compensation and employee whistleblowing”, the author examines how the composition and pay structures of audit committees influence employee decisions to escalate reports beyond internal channels. The core insight is that governance features that appear beneficial in isolation can interact in ways that unintentionally fuel external disclosures.
Lee studies a large sample of United States listed companies with alleged misconduct between 2004 and 2021 and links audit committee characteristics from BoardEx to whistleblowing cases filed with the Occupational Safety and Health Administration after issues were first raised internally. The design controls for firm attributes and uses year and industry fixed effects to disentangle the effect of financial expertise and equity linked pay from other drivers of reporting behavior. By focusing on firms where governance risks are salient, the analysis targets the setting in which escalation decisions carry real consequences for performance, penalties and litigation.
The headline result will interest every board and internal audit leader. Greater financial expertise on the audit committee is associated with fewer external whistleblowing cases when members receive relatively little equity based compensation. However, when equity incentives are high, more financial expertise is associated with more external whistleblowing. In other words, expertise helps when the pay mix limits motivational bias, but it can backfire when substantial equity exposure is added to the mix. This interaction effect is statistically significant across alternative measures of expertise and compensation, which strengthens confidence in the finding.
Why would a seasoned committee become less effective at containing and resolving internal reports when equity exposure rises. Lee builds on research in motivated reasoning and overconfidence to argue that higher equity stakes can nudge experts to overweight their own judgments and to downplay the risk embedded in whistleblower allegations, especially when disclosures threaten firm value and personal wealth. Supporting tests show the joint effect is stronger when the committee has less experience, when the committee has a higher share of non accounting experts, when there has been no recent whistleblowing to temper confidence, when members own more shares, and when cases are assessed as having merit. The pattern is also more pronounced in less regulated industries where accountability pressures are weaker. Together these results point to a behavioral channel rather than a purely structural one.
For corporate governance and internal audit the implications are direct. Compensation committees should calibrate audit committee equity awards to avoid incentive levels that amplify optimistic judgment about the adequacy of controls and the credibility of allegations. Boards should review the mix of accounting and non accounting expertise and the internal power dynamics that determine whose judgment prevails in triage and remediation. Internal audit can provide assurance over the full whistleblowing system from intake and triage to investigation and remediation, with particular attention to how committee incentives shape timeliness, fairness and documentation. Transparent protocols, independent case reviews and regular reporting to the audit committee can reduce the likelihood that valid concerns stall internally and later surface externally.
The study ultimately reframes a familiar governance playbook. Financial expertise remains valuable, yet it delivers that value when paired with incentive structures that support clear eyed oversight rather than motivated optimism. This blog reflects on the key findings in “Audit committee financial expertise, equity compensation and employee whistleblowing”, published in Accounting, Organizations and Society in 2025, can be accessed here.