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I. THESIS STATEMENT OF THE ARTICLE:

Firms tend to give more stock options to discourage whistleblowing in the workplace when they are
committing fraud.

II.SUMMARY AND ANALYSIS OF MAIN POINTS:

The value of stock options is directly tied to the value of the firm’s stock, and because whistleblowing
allegations result in an immediate decline in the firm’s stock price, employees stand to lose financially when
they blow the whistle.
 Stocks are the underlying asset of a stock option. Employees holding a stock option became
connected to the success of the company. Consequently, employees will strive hard to do
better in favor to the company. It is because the higher the profit, the higher the stock price,
and the higher the stock price, employees can hold additional wealth by the difference
between the stock option price and the stock price of the company. By blowing the whistle, it
will affect the company’s name and image to the public which will then lead to the decline of
profit and will eventually affect the employee’s financial stand.
 According to Stanford Law, misreporting firms granted 14% more stock options to rank-and-
file employees when they were allegedly misreporting their financials, but the number of
options they granted decreased by 32% after they appeared to stop misreporting. Giving out
stock options can be a form of bribery because the top level management wants to silence its
employees and refrain them from exposing their wrongdoings. It is given to the employees
especially those in the low level management because they have the higher tendency to
discover and blow the whistle about the firm’s ethical misconduct because they are more
knowledgeable about the firms’ activities and operations. Rank and file employees does not
often benefit when a firm commits fraud but by giving out stock options, it makes the story
different, since it is more beneficial for an employee to keep quiet than blowing the whistle.
Top management knows that rank-and-file employees’ goal is to earn more money and gain
promotion. However when the firms are committing fraud they increase their stock options
and decreases when they appear to stop misreporting.

Employee stock options typically have vesting terms that require employees to wait a few years
before they can exercise their options, which may act as a disincentive to blowing the whistle before they are
able to exercise their options.
 Companies issue stock options to employees in which it is the right of the employee to
exercise a set number of shares at a fixed price. Employees usually have to earn the contract
over time or in the form of vesting terms. Vesting terms is the amount of time it takes for an
employee to become entitled to an increasing percentage of their company’s stock options.
[1]
Stock options of an employee through vesting terms serve as an incentive for employees
and grant them by providing more stocks in a company for a certain amount of time or in the
future. According to Lee Jenna (2019), many companies offer option which grants with a year
vesting cliff. [2] A cliff is when the first portion of the option grants vest. Therefore, this means
that an employee must stay at the company for at least a year to exercise any option and
identify its option in more stock in a longer vesting schedule.
 As an employee a stock option incentive is a privilege, therefore it would be a waste if it is
not exercised. The thought of gaining benefits in the future will bind employees, change their
priorities, covering up their supposed to be obligation of blowing the whistle.

[1]
https://www.google.com/amp/s/www.allbusiness.com/vesting-schedules-for-stock-options-1382-
1.html/amp
[2]
https://carta.com/blog/what-is-stock-vesting/
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III.CONCLUSION:
There are three main factors that causes someone to commit occupational fraud. It consists of three
components which, together, lead to fraudulent behavior: Pressure, Opportunity, and Rationalization. [2] Under
the Opportunity component many opportunist offenders cover fraud acts by making ways to conceal their
wrong doings through inventing innovative tactics such as providing stock options during alleged misreporting
so as to discourage whistleblowing.
Pointed out in the Article, there are some research (e.g. Stanford Law school Database) that
concluded out how stock options could discourage whistleblowing of fraud. This is because stock options are:
 Stock option price will reduce due to whistleblowing allegations where lower stock price
means lower benefits and that whistleblowing incentives is not enough collateral for
whistleblowing disadvantages.
 Stock price are fluctuating every year. As an incentive, maximization of stock price will
become a priority resulting to the cover up of whistleblowing alleges in the short term.
The article highlights the value of corporate ethics and professionalism as foundation of a successful
fraud free firm. The article is an eye-opener and catalyst for firms and business professions such as the
accountants to be more aware of how fraud works in many different ways. Being alert, attentive and informed
about the firm will give an edge to make changes for the welfare of all interested parties. As an ethical issue,
the article also relates to the ethical code and standards followed by business professions (accountants) that
following this code pertains a well-developed professional with integrity and respect towards others.
Preventing fraud must become the top management’s goal to promote healthy business and a
healthy competition. In situations where a company is in fraud we must not tolerate this wrong-doing and
blow the whistle as early as we can. Amidst disadvantages, becoming a sacrifice for the good of others will help
the general welfare of the investors, creditors and the economy as a whole.

[2]
Donald R. Cressey, Other People's Money (Montclair: Patterson Smith, 1973) p. 30.