A Publication of WTVP

Fraud costs companies more than $600 billion a year—about $100,000 bilked per company per case, on average. A hotline tip led to the discovery of fraud in nearly 40 percent of the cases, yet only one-third of the companies stung by fraud have fraud hotlines, according to the Association of Certified Fraud Examiners’ (ACFE) 2004 Report to the Nation on Occupational Fraud and Abuse. And only 21 percent of midsize companies use a hotline, according to a recent RSM McGladrey survey.

Professionals who work with companies to prevent fraud say establishing a hotline is one of the cheapest and easiest ways to uncover fraud. A hotline maintained by an outside vendor can range in cost from just $1 to $6.50 per employee per year.

That modest investment can produce real dividends. Companies with fraud hotlines cut their losses by about half because the fraud was detected earlier, according to the ACFE.

Interest in fraud hotlines has grown since passage of the Sarbanes-Oxley Act of 2002, which mandates public companies set up procedures for the “receipt, retention and treatment of complaints” about accounting controls or auditing issues. While this is a requirement for publicly held companies, it’s a valuable practice for privately held organizations as well; investors and lenders expect companies to be active in developing fraud detection and prevention programs.

In addition to detecting fraud, a hotline can help correct other problems such as unsafe working conditions, workplace violence, harassment, and discrimination. This could reduce expenses resulting from workers’ compensation claims, lawsuits, negative publicity, and lower productivity.

A fraud prevention hotline is most often a telephone system but also can be a web-based tool. If choosing a telephone system, professionals recommend it be toll-free and operate 24 hours a day, seven days a week. Employees are reluctant to call during work hours to report on coworkers or bosses; a study reported in the CPA Journal said more than 40 percent of calls to hotlines are made at night or on weekends.

Whenever possible, include the means for anonymous ongoing dialogue with the person reporting the incident; this can be helpful in assisting an investigation. One option is to have hotline attendants issue PIN numbers to first-time callers and request that they call again in two weeks’ time.

The telephone system should be staffed—answering machines aren’t effective. If no one answers, the caller may not call back. It’s important to preserve confidentiality and protect the caller from retaliation by permitting them to remain anonymous. The hotline should be answered by trained professionals—optimally, an outside provider—who can listen well, ask questions, document the discussion, and convey the information to the appropriate person in the organization.

The caller may be nervous and leave out important details; a trained interviewer will know what questions to ask to ensure the company receives enough information to conduct an investigation. This is important because a company could be exposed to greater liability if it’s found to have been aware of an issue but didn’t gather enough information to properly address it.

Senior management should inform employees the hotline is available and encourage them to use it to report illegal or unethical behavior. The most effective communication plan includes a mixture of media designed to reinforce the message, including posters or signs in break rooms, brochures distributed at staff meetings, and notices placed in employee newsletters.

The American Institute of Certified Public Accountants (AICPA) encourages the use of hotlines and, once instituted, recommends each employee receive a letter announcing the program and a business card with the hotline number. New employees should receive this information as part of their orientation, and it’s recommended that HR representatives document that employees have received information about the hotline and understand its use.

Ongoing communication reinforces the purpose of the hotline and reassures employees that reports are taken seriously. This commitment to ethics supports whistleblowers and becomes a part of the corporate culture.

Look beyond your employees for tips; vendors and suppliers can be a valuable source of information. The ACFE found up to 20 percent of all hotline tips were from customers, vendors, and other anonymous out-of-company sources. Professionals recommend offering hotline access to the employees of key suppliers so they can confidentially report any concerns.

Deciding who should receive tips from the hotline is important, and established channels should be communicated clearly to the hotline provider. It’s recommended that discrimination allegations be forwarded to HR or legal, and fraud tips should be forwarded to both the internal audit department and a representative from your board’s audit committee.

If your company doesn’t have an internal audit department—or even a formal audit committee—tips should be reported to designated officers of the company: people in authority who don’t work closely with liquid assets so there’s no appearance of impropriety. Some companies have established the position of chief ethics officer to administer the fraud prevention program. Tips are passed along to this officer and at least one other party; this creates accountability for appropriately following up on allegations. Holding all executives responsible for managing fraud risks in their area of the company will encourage an active interest.

Every tip should be documented and investigated. A database of reports allows the hotline administrator and audit committee to review allegations, assess what was done to investigate them, and record what—if any—disciplinary action was taken. Be certain the database is maintained in a secure environment. Like any other initiative, it’s important to perform periodic, ongoing evaluations of the hotline program.

A hotline, of course, should be just one part of an overall fraud prevention program that also includes:

• Instituting guidelines that discourage acts of fraud—separate financial functions, cross-training of staff, and enforcement of mandatory vacation policies.
• Giving your audit committee a direct channel to the board of directors; this minimizes the possibility of undue influence on the part of a manager or executive.
• Educating your internal audit staff on the latest techniques—the ACFE and AICPA both offer courses on uncovering fraud.
• Conducting background checks on potential employees; the extent to which a company screens prospective employees sends a strong message.

Setting up a hotline reduces the risk of fraud, as well as provides an opportunity to demonstrate your company’s commitment to ethical behavior. IBI