Tips are one of the most common fraud detection methods. In 2016, the Association of Certified Fraud Examiners analyzed more than 2,000 cases of occupational fraud in 114 countries. In approximately 39% of cases, the fraud was discovered by receiving a tip. Organizations with reporting hotlines are more likely to detect fraud than organizations without hotlines: 47% vs. 28%.
Warren Buffett, chairman and CEO of Berkshire Hathaway, stated in 2005:
Berkshire would be more valuable today if I had put in a whistleblower line decades ago. The issues raised are usually not of a type discoverable by audit, but relate instead to personnel and business practices…You’ve got to act promptly, and I don’t know any better system than hotlines and anonymous letters.
Berkshire Hathaway has approximately 367,000 employees and receives about 4,000 calls a year on their hotline. “Most of them are frivolous: ‘The guy next to me has bad breath or something like that,'” Buffett said, “but there are a few serious ones.”
Whistleblower hotlines represent a potential goldmine of information. Callers can report allegations of fraud, corruption, misconduct and unethical behavior. They can also share concerns about non-compliance with company policies and offer warnings about risk areas going unchecked.
Who’s Blowing the Whistle?
According to the ACFE 2016 Report to the Nations, the top three sources of tips are employees (52%), customers (18%) and vendors (10%).
Some individuals feel comfortable coming forward and discussing concerns face to face with a supervisor, others do not. Employees often hesitate to reveal their identity – fearing possible retaliation for reporting the dishonest behavior of a fellow employee or manager. According to an Ernst & Young survey, 80% of those surveyed said they would be willing to report a co-worker’s illegal or unethical activity and 39% would be more likely to make a report if they could remain anonymous. For employees, hotlines can offer anonymity – a powerful tool.
Whistleblower hotlines can be used within any size of organization – from small, family-run organizations to large multi-national companies. Whether a company has 100 employees or 100,000 employees, the fundamentals of a reporting hotline remain the same. The goal is to give employees, suppliers and others the means to come forward to report information to management or to the board of directors.
Implementing a Successful Hotline Program
Variety of Channels
The whistleblower program should provide individuals with every possible means to report information, ideally through easily and cheaply accessible channels 24 hours a day, 365 days a year. The majority of incoming tips occur during non-business hours. Possible communication methods, in addition to in-person reporting, include:
• A telephone hotline
• Online forms
• A dedicated email address, fax number or mail address (e.g., P.O. Box)
The reporting methods each have their advantages and disadvantages. According to the Federal Bureau of Investigation’s hierarchy for communications during an investigation, face-to-face communication is best, followed by a telephone interview, followed by written communication. Live interaction offers the ability to clarify unclear or incomplete statements, detect and question nuances (like voice inflection) or hear other voices in the background coaching the caller.
Although telephone and in-person reporting methods allow for interaction and further information gathering, individuals must be trained to handle sensitive information and appropriately communicate with whistleblowers – who may be hesitant, anxious or emotional – to collect sufficient information.
Internal or External Hotline Considerations
Costs of training, operations and technology and the perception of trustworthiness are considerations when determining whether an internally staffed or third-party hotline is best. Management should evaluate whether in-house staff can appropriately handle the hotline.
Although internal hotlines may be more cost-effective, there are drawbacks. If employees realize they are calling an internal number, they may fear their identity will be traced and decide not to call. There is also the potential for inconsistent handling of sensitive calls and callers encountering voicemail. Anonymous callers, often cautious about leaving a recorded message, may leave brief messages lacking information that would help the organization to investigate.
An external, professional hotline provider, although more costly, provides greater safeguards of anonymity and more expertise. External hotlines offer trained personnel, resources and technology.
Any effective hotline program reassures employees and provides confirmation they can come forward with reports without fear of retaliation and that they have the right to remain anonymous. Reporters can be encouraged to provide specific, credible information, including but not limited to, names of suspected employees, locations, times, etc. to support their report, while maintaining their anonymity.
Support from the Top
The first step in any new whistleblower program is discussing the program with employees. The company’s philosophy on fraud and business abuse should be explained. The employee communication should also include theft methods and red flags often seen in internal theft. Employees should be reminded frequently of the purpose of the hotline and when they should call. It is also important for management to promote the message that ethics, integrity and compliance are part of the company’s culture.
A well implemented and maintained reporting hotline is a powerful detection tool for companies. By offering confidentiality, a hotline encourages and gives employees, vendors and others the confidence to report their concerns. While a hotline doesn’t stop the fraud from occurring in the first place, it can help to mitigate the loss.