Use a Reporting Hotline to Fight Fraud

Tips are the most common method of detecting fraud, according to Occupational Fraud 2022: A Report to the Nations. This study, published by the Association for Certified Fraud Examiners (ACFE), found that 42% of frauds were uncovered through tips — more than three times the next most common method (internal audits).

The best way to encourage tips from employees and other stakeholders is to implement a confidential fraud reporting mechanism. Every company needs some way for people to report suspicious behaviors. And whistleblower-friendly options, such as email and online forms, can be more practical and affordable for smaller organizations than traditional telephone hotlines.

Tips help reduce fraud losses

Employees are an organization’s first line of defense against fraud. Providing workers with an effective reporting mechanism can dramatically lower fraud losses and duration. Although more than half of tips come from employees, outside stakeholders — such as contractors, customers, suppliers and even competitors — may also use a company’s reporting mechanisms.

The ACFE reports that organizations with fraud reporting mechanisms suffered a median loss of $100,000, compared to $200,000 for organizations without hotlines. In addition, victim-organizations with hotlines detected fraud in 12 months, compared to a median duration of 18 months for those without reporting mechanisms.

Public companies are required to implement fraud reporting mechanisms as part of compliance with the Foreign Corrupt Practices Act and the Sarbanes-Oxley Act of 2002. But compliance is generally voluntary for private organizations.

Approximately 70% of respondents to the 2022 ACFE report have fraud reporting mechanisms in place. But what’s considered “effective” has evolved in recent years. In 2016, the most popular reporting mechanism was telephone hotlines, which accounted for 40% of tips. Today, email is the most popular format (40% of all tips), followed by online forms (33%). In the latest study, only 27% of whistleblower reports came from telephone hotlines.

That’s good news for organizations with limited resources. In general, the costs of running a 24-hour, 365-day, multilingual telephone hotline are higher than the costs of handling tips obtained via email and online forms. However, in some cases, it’s more cost effective and practical for smaller organizations to outsource their hotlines to third-party providers who specialize in handling fraud claims.

When setting up a fraud reporting mechanism, you should establish policies that protect the confidentiality of whistleblowers and prevent retaliation, including verbal bullying or job loss. This is especially important when employees report on suspected wrongdoing by their superiors or at small organizations where it may be difficult to secure the whistleblower’s identity.

Comprehensive training is key

Fraud training programs are another important component of effective reporting mechanisms. Training actively engages employees and other stakeholders in the fraud prevention and detection process in several ways. First, it tells people where they can go to report suspicious behaviors and provides guidelines about what types of improprieties are reportable events. In addition to providing periodic in-person fraud training, consider hanging posters in your company’s breakroom and creating a dedicated page on your website that provides information for whistleblowers about your reporting mechanisms.

Fraud training should also cover potential red flags and common schemes in your industry. This information helps empower and educate would-be whistleblowers. In fact, some organizations experience an uptick in reports of suspicious behaviors shortly after they implement a fraud training program. It’s common for recently trained employees to associate what they’ve learned with questionable behaviors they’ve been seeing in the workplace. Essentially, the training validates what the whistleblower’s “gut” has been telling them.

It’s important to note that not all tips come through a formal reporting mechanism. Some reports are made informally to individuals within the organization, such as an employee’s supervisor, co-workers, and internal or external auditors. Because anyone in your organization could potentially receive a report, your training should explain the policies and procedures for handling fraud allegations.

Handling claims

It’s important to have a plan in place before an impending crisis. Different departments and levels of management may become involved, depending on the nature of a whistleblower’s complaint. Beware: Some complaints may reveal other problems in the workplace besides fraud, such as unsafe working conditions, sexual harassment or substance abuse by co-workers.

Consult with your CPA and legal advisors to help implement an effective reporting mechanism, provide comprehensive fraud training and develop effective procedures for handling whistleblower complaints. These trusted advisors can also help review your company’s existing anti-fraud controls and further mitigate your exposure to fraud risks.

Sidebar: Thinking Beyond Traditional Audit Services

External audits of financial statements are the top anti-fraud control used by organizations, according to the ACFE’s Occupational Fraud 2022: A Report to the Nations. Public companies are required by the Securities and Exchange Commission to issue audited financials, but audits are voluntary for most private organizations.

The latest ACFE report found that approximately 82% of respondents issued audited financial statements. External audits help deter would-be fraudsters by providing the perception that someone is overseeing the company’s financial reporting processes.

External auditors are also trained in the warning signs of theft, financial misstatement and corruption. So, they sometimes catch wrongdoing during fieldwork. But savvy fraudsters may be adept at hiding their activities, especially if they’re colluding with coworkers or customers. External audits provide no guarantees against fraud.

If you suspect wrongdoing, there are other anti-fraud procedures that your CPA can provide to help detect fraud. Examples include:

  • External audits of internal controls over financial reporting,
  • Formal fraud risk assessments, and
  • Surprise audits.

In particular, the 2022 ACFE study found that surprise audits reduced the median fraud loss and duration by at least 50%. However, only 42% of the study’s respondents reported using surprise audits.

Your Hood & Strong team can also conduct a formal forensic accounting investigation. A formal investigation is usually proceeded by additional anti-fraud procedures to assess the feasibility of pursuing a claim. A forensic accounting specialist can help create a legal paper trail to use if you decide to terminate, seek restitution from and/or prosecute an alleged fraudster.