Using Tips and Hotlines to Detect Corporate Fraud

The Association of Certified Fraud Examiners (ACFE) recently published its 2012 Report to the Nations on Occupational Fraud and Abuse. This publication reports the findings from an analysis of more than 1,300 cases of occupational fraud that were reported to the ACFE by Certified Fraud Examiners (CFEs) around the world. Consistent with information gathered by the ACFE in previous studies, this report found that the initial detection of occupational fraud was most often due not to internal or external audits, strong internal controls or police reports, but, rather, from tips reporting suspicious activities.

Tips can come from various sources, including employees, customers, vendors or even competitors. When pursued, tips about suspicious activities can uncover covert activities that, if left undetected, can be devastating to an organization. The current ACFE study reveals that 43% of the reported fraud schemes were first detected due to tips. So, if tips can be such a valuable source of information, what should an organization do to encourage people to provide them?

Providing a Hotline

A telephone hotline provides a great avenue for reporting suspicious activities. Hotlines should be well-publicized and easily accessible and should generally provide the option of anonymity. People who are inclined to provide tips often prefer to do so anonymously. They may be reluctant to “blow the whistle” on a coworker or other acquaintance because they like the person or because they recognize that they may be wrong in their suspicions. Providing an anonymous hotline provides a whistleblower mechanism that helps overcome these concerns. On the other hand, some people are motivated by rewards, so rewards for those who choose to give information and provide their name may also promote use of the hotline.

Establishing an Ethical Corporate Environment

However, before management of any organization creates a hotline for the receipt of tips, it must create a certain “tone at the top.” Management should make it clear that all employees, including those at the top of the organizational chart, are expected to act in an ethical manner in all of their dealings. Further, it must be clear that unethical or fraudulent behavior will not be tolerated. Without establishing this tone at the top, creation of a hotline seems like a hollow gesture to those who might provide valuable information.

Internal and external audits and a strong internal control system may lead to the detection of fraudulent activity and can be valuable fraud deterrents. However, management should also provide an easy method for people to provide tips about suspicious activities in the organization in order to capitalize on this proven fraud detection source.