Fraud Hotlines: Are They Necessary? Do They Work?

Thoughtware Article Published: Mar 21, 2016
Forensics, Investigation, Litigation

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

Let me convince you.

First, the Association of Certified Fraud Examiners (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse indicates that the typical organization loses $145,000 annually to occupational fraud (fraud committed against a company by its own employees). The typical small organization (less than 100 employees) loses $154,000 to occupational fraud. So like it or not, your organization is at risk.

Second, ACFE 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. A properly 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. According to ACFE research, hotlines result in a 41 percent reduction in median loss and a 50 percent reduction in the duration of the fraud. So 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 organization; do we need a hotline?

Yes, you do! Organizations of all sizes should have fraud hotlines. Fraud hotlines can be particularly beneficial to smaller entities, 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 organizations.

Okay, so my company could benefit from a fraud hotline. But I know a local company that signed up for a hotline service, sent out an email to employees announcing the hotline and was surprised when they didn’t receive any reports. What about that?

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

To actively engage your employees, you need to educate them on what occupational fraud might look like in their respective areas of responsibility. A good hotline service will train employees about the most prevalent types of fraud in your industry. Here are some of the benefits of training your employees:

  • Employees have a tendency to explain away the clues of occupational fraud when they see them in close associates—but if they’ve been trained on what red flags for fraud actually look like, they’re 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’ll more quickly recognize a potential fraud and remember they have an avenue to let you know about their concerns. The earlier you know about 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 co-workers’ annoying personal habits 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 a crisis is looming. 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 do have one, make sure it’s been properly implemented. Because with fraud, it’s not just your company’s money at risk—it’s your reputation, as well.

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