Industry Insights

Fraud Hotlines:  Are They Necessary? Do They Work?

September 2016
Author:  Shauna Woody-Coussens

Shauna Woody-Coussens

Managing Director

Forensics & Valuation Services

Not-for-Profit & Government

1201 Walnut Street, Suite 1700
Kansas City, MO 64106-2246

Kansas City

You have been hearing a lot about the benefits of a fraud hotline, but does your institution really need one? Yes, or more emphatically, YES!

Let me convince you why.

First, the Association of Certified Fraud Examiners’ (ACFE) 2014 Report to the Nations indicates that occupational fraud (committed against your institution by your own employees) is more prevalent in the banking and financial services industry than in any other industry. That makes sense if you think about it—banks have a lot of cash, and fraudsters want cash. So like it or not, your institution is at risk for occupational fraud.

Second, the ACFE’s research indicates that occupational fraud is more likely to be detected through a tip than by any other method, including internal audits, management reviews, documentation examinations or external audits. An appropriately implemented, confidential hotline service makes your employees part of your fraud prevention and detection program and can significantly reduce the frequency and magnitude of potential frauds. The ACFE research indicates hotlines result in a 41 percent reduction in median loss and a 50 percent reduction in the duration of the fraud. Therefore, it makes good sense—and is good corporate governance—to give your employees a way to alert you about potential fraud or unethical behavior.

But we’re a pretty small bank; do we need a hotline?

Yes, you do! Banks of all sizes should have fraud hotlines. Fraud hotlines can be particularly beneficial to smaller institutions, which typically have fewer internal controls and resources dedicated to fraud prevention. Furthermore, confidential hotlines hosted by third parties are available at cost-effective prices for even the smallest institutions.

Okay, so my bank could benefit from a fraud hotline. But I know a local bank that signed up for a hotline service, sent out an email to employees announcing the hotline and was surprised when they received no reports. What about that?

If it were only that easy. An effective fraud hotline requires some forethought, planning and good execution to generate the potential benefits. First, you need to think about how you’re going to introduce the hotline to your employees. Merely sending out an announcement email and hanging a poster in the break room will not do! The email is forgotten and the poster quickly becomes wallpaper next to the coffee machine.

To actively engage your employees in the process, you need to educate them on what occupational fraud might look like in their areas of responsibility. A good hotline service will train employees about the most prevalent types of fraud in the banking industry. This is very important, because fraud related to the teller line or vault looks very different from fraud involving an officer’s loan portfolio. Training your employees has a number of benefits:

  • Employees have a tendency to explain away the clues of occupational fraud when they see them in close associates—but if they have been trained on what red flags for fraud actually look like, they are more likely to recognize them for what they are.
  • Educating your employees turns them into your “eyes and ears” when it comes to fraud. They will more quickly recognize a potential fraud and remember they have an avenue to let you know about their concerns. The earlier you know about a potential fraud, the quicker you can investigate. And believe me, no fraud gets smaller over time. So the sooner you can address a potential situation, the better!
  • Employees will better understand what the hotline should be used for, and you’ll get fewer reports about annoying personal habits of co-workers or “bad hair day” calls.

So, we implement a hotline and we get a report. What do we do now?

You need to decide which personnel, in which departments, should be involved in various types of internal investigations. The CFO may not need to be involved in the investigation of an HR report, and the vice president of HR may not need to be involved in a potential accounting issue. For some reports, you may need to consult with outside counsel or forensic accountants. It’s good to think about these issues before an impending crisis. Your hotline service should help you determine an appropriate investigation protocol for your institution. If your hotline service has experienced fraud professionals on board, they could even help you determine appropriate procedures for internal investigations.

So if you don’t have a fraud hotline, you should, and if you have one, make sure it was implemented appropriately. Because with fraud, it’s not just your institution’s money at risk—it’s your reputation as well.

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