5 Conclusion and discussion
This paper addresses the question of whether there is the chance that whistle-blowing can serve as a remedy for fraudulent behaviour. We show that the classical twoperson inspection game including a (fraudulent) manager and an (imperfect) internal auditor can be extended by whistle-blowing. Because of the latter, we fnd that the intensity of the internal audit is generally lower than in absence of whistle-blowing, as the latter serves as a substitute for thorough auditing. Moreover, we fnd that the chance of whistle-blowing reduces the manager’s willingness to act fraudulently as compared to the case without whistle-blowing only if two conditions hold.
First, she must be unable (or cannot) anticipate whether or not blowing the whistle has repercussions on the employee. That is, she takes into account that whistleblowing can potentially be costless for the employee, which signifcantly increases the chance of a revelation of her fraud as there might be no reason for the employee to stay quiet. Second, the efcacy of internal audit without whistle-blowing must be sufciently low, such that whistle-blowing represents a strong improvement relative to the status quo. Otherwise, if one or both conditions are not satisfed, whistleblowing actually worsens the situations, as, on the one hand, the audit level is lower than without, and, on the other hand, the manager’s willingness for fraud grows.
