U.S. businesses lose millions of dollars to white-collar criminals every year. The manufacturing sector is especially vulnerable to fraud schemes involving billing, corruption and noncash assets, such as theft of inventory and equipment. Research suggests that businesses that provide a convenient and confidential way for employees to report unethical behavior are more likely to unearth embezzlement and other wrongdoing sooner and suffer smaller losses than those without established “whistleblower” policies.
Anti-Fraud Prevention and Detection Controls Study Results
Proactive fraud prevention and detection controls can substantially reduce a company’s risk of fraud and minimize fraud losses, but all anti-fraud tools aren’t created equal. In the 2018 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) has consistently found that tips are the most common method of detecting fraud by a significant margin.
In the 2018 report, the ACFE found that 40% of occupational frauds were detected by tips. Organizations that had reporting hotlines were much more likely to detect fraud through tips than organizations without hotlines (46% compared to 30% respectively). The second most common method of detection was internal audit, which unearthed fraud in only 15% of the cases in the study.
Anti-Fraud Control: Reporting Telephone Hotlines
Based on these statistics, it stands to reason that reporting hotlines can be a critical weapon when deterring fraud and minimizing losses. The ACFE reports that organizations without an anonymous hotline suffered about two-thirds higher average fraud losses than those lacking this prevention mechanism.
Many private companies forgo reporting hotlines, because they’re seen as expensive and too formal for closely held organizations. About 63% of the companies in the 2018 ACFE study had a reporting hotline in place, and 50% of those experienced lower fraud losses. Implementing an effective reporting mechanism can be a powerful way to prevent and detect fraud for companies of all sizes.
Whistleblowers: Minimize the Fear of Retaliation
Most employees are honest and want to do what’s best for their employers. However, whistleblowers may fear retaliation from co-workers if they speak up against wrongdoers or their allegations don’t pan out. This is especially true in smaller companies where it may be harder to safeguard a whistleblower’s identity.
An important component of an effective reporting hotline is to establish policies to protect the confidentiality of whistleblowers and prevent backlash, including verbal bullying or job loss — especially when employees report on suspected wrongdoing by their superiors. Often it’s beneficial to consult with an attorney to ensure that the company’s hotline and related policies comply with employment laws and other regulations that may apply where you operate.
When selecting a manager to oversee the reporting hotline, choose someone who’s fair and impartial and engenders trust among people inside and outside the organization. Provide your “ethics officer” with authority and training to act on information conveyed through the hotline. Hotlines can also be managed externally by third-party vendors.
In cases detected by tip at organizations with formal fraud reporting controls, telephone hotlines were the most commonly used method (40%), the second most used method with email (26%). We must also note that cases detected by tip with no hotline were only (30%).
Fraud Hotlines: Promote and Facilitate Reporting
Of course, employees need to know about the hotline before they’ll use it. Once you implement a confidential telephone or Internet reporting hotline, conduct a meeting to promote it to both would-be perpetrators and those who might make a report, including employees, clients, shareholders and vendors.
- The hotline should be convenient to use and available 24/7 in multiple languages.
- Have a live person answer – preferably a third-party vendor
- Educate employees about information to provide
- Don’t ask for the caller’s name or use caller ID
- Investigate tips thoroughly and report their dispostions to all stakeholders.
Distribute guidelines for the reporting hotline when it’s first launched, when you conduct periodic fraud prevention training and when new employees join the company. Also create print and electronic promotional materials for the hotline to display in high-profile locations, such as in the lunchroom and on the company’s intranet site.
Remember, too, that reporting hotlines can unearth other problems besides fraud, such as unsafe working conditions or drug abuse by co-workers. Some companies even set up their hotlines to serve as an electronic “suggestion box” for ways to improve operating efficiencies or offer new product ideas.
Investigate Reported Tips Thoroughly
Employees are more likely to report fraud if the company acts on tips in a prompt, serious manner and demonstrates a zero-tolerance policy for fraud. The most serious allegations should be reviewed with legal counsel first. Often timely follow-up necessitates the use of an outside forensic accounting specialist who is trained in collecting a thorough and defensible trail of evidence.
Internal Controls: Benchmark Your Organization
Compare your organization’s fraud risks by industry, region and size. Benchmark your anti-fraud efforts against similar organizations and against the most effective methods for reducing fraud losses.
Did you know that internal control weaknesses were responsible for nearly half of frauds?
The ACFE report to the nations is an important reminder to ensure your organization is constantly assessing its fraud risk and updating its controls to keep pace with the evolving world of fraud.
Learn more about Internal Audits and contact us for help preventing occupational fraud in your organization.