RSM Resources

Fraud costs companies more than $600 billion ayear — about $100,000 bilked per company per case, on average.

A hotline tip led to the discovery of the fraud innearly 40 percent of the cases, yet only a third of the companies stung byfraud have fraud hotlines, according to the Association of Certified FraudExaminers’ (ACFE) 2004 Report to the Nation on Occupational Fraud and Abuse.And only 21 percent of midsized companies use a hotline, according to a recentRSM McGladrey survey.

Professionals who work with companies to preventfraud say establishing a hotline is one of the cheapest and easiest ways touncover fraud. A hotline maintained by an outside vendor can range in cost fromjust $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 fraudwas detected earlier, according to the ACFE.

Interest in fraud hotlines has grown since passageof the Sarbanes-OxleyAct of 2002, which mandates public companies set up procedures for the"receipt, retention and treatment of complaints" about accountingcontrols or auditing issues.

While this is a requirement for publicly heldcompanies, it’s a valuable practice for privately held organizations as well —investors and lenders expect companies to be active in developing frauddetection and prevention programs.

In addition to detecting fraud, a hotline can helpcorrect other problems such as unsafe working conditions, workplace violence,harassment and discrimination. This could reduce expenses resulting fromworkers’ compensation claims, lawsuits, negative publicity and lowerproductivity.

Setting up a hotline

A fraud prevention hotline is most often atelephone system but can also be a Web-based tool. If choosing a telephonesystem, 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 reporton coworkers or bosses — a study reported in the CPA Journal says morethan 40 percent of calls to hotlines are made at night or on weekends.

Whenever possible, include the means for anonymousongoing dialogue with the person reporting the incident, this can be helpful inassisting an investigation. One option is to have hotline attendants issue PINnumbers to first-time callers and request that they call again in two weekstime.

Staffing the hotline. The telephone system should be staffed — answeringmachines are not effective. If no one answers, the caller may not call back.It’s important to preserve confidentiality and protect the caller fromretaliation by permitting them to remain anonymous.

The hotline should be answered by trainedprofessionals — optimally an outside provider — who can listen well, askquestions, document the discussion and convey the information to theappropriate person in the organization.

The caller may be nervous and leave out importantdetails; a trained interviewer will know what questions to ask to ensure thecompany receives enough information to conduct an investigation. This isimportant because a company could be exposed to greater liability if it’s foundto have been aware of an issue but didn’t gather enough information to properlyaddress it.

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

The American Institute of Certified PublicAccountants (AICPA) encourages the use of hotlines and, once instituted,recommends each employee receive a letter announcing the program and a businesscard with the hotline number. New employees should receive this information aspart of their orientation, and it’s recommended that HR representativesdocument that employees have received information about the hotline andunderstand its use.

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

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

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

If your company doesn’t have an internal auditdepartment, or even a formal audit committee, tips should be reported todesignated officers of the company — people in authority who don’t work closelywith liquid assets so there’s no appearance of impropriety.

Some companies have established the position ofchief ethics officer to administer the fraud prevention program. Tips arepassed along to this officer and at least one other party — this createsaccountability for appropriately following up on allegations.

Holding all executives responsible for managingfraud risks in their area of the company will encourage an active interest.

Keeping a record. Every tip should be documented and investigated. Adatabase of reports allows the hotline administrator and audit committee toreview allegations, assess what was done to investigate them, and record what,if any, disciplinary action was taken. Be certain the database is maintained ina secure environment.

Like any other initiative, it’s important toperform periodic, ongoing evaluations of the hotline program.

Part of a larger program

A hotline, of course, should be just one part ofan overall fraudprevention 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, aswell as providing an opportunity to demonstrate your company’s commitment toethical behavior.