When Theranos founder Elizabeth Holmes restricted her employees' access to information about the company's faulty Edison devices, she inadvertently created the conditions for catastrophe—a lesson that new research suggests applies far beyond Silicon Valley. The blood-testing company's collapse after producing unreliable results that led to patient misdiagnoses offers a stark illustration of how controlling information flow, paradoxically, can result from attempts to strengthen accountability itself.
That paradox is at the heart of groundbreaking research from Ronghuo Zheng, an associate professor of accounting at the McCombs School of Business at The University of Texas at Austin, and Lin Nan of Purdue University. Their work, published in The Accounting Review, challenges a widely held assumption about whistleblower incentives: that bigger rewards automatically translate to more reporting and safer companies.
The Securities and Exchange Commission has embraced this logic wholeheartedly, handing out whistleblower awards as high as $20 million in recent years. Yet Zheng and Nan's model suggests that such generosity, while well-intentioned, can backfire spectacularly. The researchers propose that whistleblower incentives operate in what they call a "Goldilocks range"—a sweet spot where rewards are strong enough to encourage reporting without being so large that they fundamentally alter workplace dynamics.
The mechanism works through internal communication. When a manager discovers a defect like a safety flaw or regulatory violation, they must decide whether to share that information with employees, who can either fix the problem internally or report it to regulators. At moderate reward levels, this system functions as intended: managers trust their teams enough to share information, employees correct defects, and serious misconduct reaches the authorities who need to know.
But when rewards become excessive, the incentive structure inverts. Employees aware of problems become more likely to report them externally rather than work to fix them internally—a rational choice when financial stakes are that high. Anticipating this shift, managers respond strategically by restricting information access altogether. "Management may not share useful information with employees because of the whistleblowing threat," Zheng explains, describing a phenomenon that undermines the very accountability such rewards are meant to strengthen.
The implications are sobering. Less information flowing through internal channels means fewer opportunities for problems to be identified and resolved before they metastasize. Medical devices, automobiles, and aircraft all carry risks that escalate when defects are suppressed rather than addressed. The Theranos case demonstrates how information silos, whether intentionally created or inadvertently encouraged, can allow serious harms to multiply unchecked.
Zheng emphasizes that his research is theoretical, grounded in formal economic modeling rather than real-world data analysis. Yet the dynamics it illuminates reflect genuine patterns in how organizations function and fail. The findings suggest a more nuanced approach for regulators like the SEC, one that calibrates incentives carefully on a case-by-case basis rather than simply increasing rewards across the board.
"Regulators shouldn't think higher is always better," Zheng says—a principle that extends well beyond whistleblower policy. Sometimes protecting the public requires resisting the impulse to amplify the loudest mechanism, and instead tuning the entire system to work in concert.