Fraud investigators and law enforcement professionals have long relied on informants to provide information to help them solve cases.
Informants provide information or tips for a variety of reasons. It might be a feeling of moral responsibility, a grudge or even a chance to play detective. Whatever the reason, these tips are powerful tools in the fight against fraud.
The Association of Certified Fraud Examiners consistently has reported that tips by employees and others are – by far – the most common method of fraud detection.
In its most recent biannual report, the ACFE found that 43.3 percent of fraud discoveries came from tips. Of those, more than half the tips came from employees, 22 percent from customers, 9 percent from vendors, 2 percent from shareholders, 1.5 percent from competitors. Another 12 percent came from anonymous sources.
The presence of a hotline also resulted in fraud being discovered earlier, and thus a lower monetary loss for the company, the study found.
For instance, in companies without hotlines, 11 percent of frauds were found by accident, whereas in companies with hotlines, only 3 percent were found by accident. Similarly, in companies without hotlines, 6 percent of fraud was found by external audit, whereas only 1 percent was found by audit in organizations with hotlines.
Vendors, shareholders and customers, as well as current and former employees, need to be provided with a process to confidentially report suspected wrongdoing.
While an open-door policy may be effective in some circumstances, many employees are not comfortable revealing their identity because of fear of retaliation or ridicule if their concern proves to be without merit.
One-way communication, such as anonymous letters or phone messages, frequently leaves out critical information necessary to investigate the allegation. The most effective communication tool for receiving tips is the hotline.
Some organizations offer internal hotlines, but this solution comes with significant problems. Chief among them are operational issues such as inconsistent handling of calls, staff training and off-hours voice-mail reporting. Fear of recognition may keep employees from using an internal system.
The best choice for most companies is to contract with an external hotline provider. These organizations provide trained interviewers and the technology to efficiently operate the hotline. Their phones are staffed 24/7, 365 days a year. Around-the-clock availability is critical, since more than half of all calls are received outside of business hours.
Two-way communication is essential to validating the tip and converting it to an actionable report. There is no substitute for human interaction when dealing with an anonymous caller, because there may never be another chance to gather information.
Tipsters typically are emotionally charged, causing them to leave out important details. A skilled interviewer will probe to ensure that pertinent information is gathered in the initial call. Red flags such as slurred speech or an inability to answer logical questions or clarify information will alert the interviewer to the possibility of a phony tip.
In addition to theft, employees often report financial irregularities, sexual harassment, discrimination, safety issues, drug use and workplace violence. Vendors and customers may report kickback attempts and service problems.
Control and responsibility
Because of the variety of issues being reported, a distribution and follow-up matrix should be developed to ensure that no tips are overlooked. Dual distribution is a valuable control feature. If a single individual is responsible for handling the reports, that person, if somehow involved, could prevent an investigation.
Allegations of financial irregularities present a complicated situation for publicly traded companies. Sarbanes-Oxley requires the audit committee of the board of directors to develop a method for the treatment of tips.
Tips regarding financial irregularities should be sent directly to the audit committee. The hotline provider should provide procedures that satisfy the treatment and retention requirements of Sarbanes-Oxley.
Once the tip is received, it must be investigated by the right people within the organization. Generally, the action recipient is charged with developing procedures to investigate issues reported to them.
Organizations without internal audit departments or a formal board of directors often reach outside the organization for assistance. A designated officer of the company may serve as the action recipient with the outside auditor acting as follow-up recipient.
Many organizations are developing relationships with accounting firms that specialize in forensic accounting, thus giving them an independent source to manage investigations.
Certain high-risk tips must be acted on immediately. Depending on the nature of the business or the danger to employees, certain matters may not wait until Monday.
Examples could include:
- Employee violence
- Business interruption
- Theft of trade secrets
- Terrorist threats
Regular communication with employees, vendors and others about the organization’s commitment to ethical behavior and what is not acceptable will encourage them to bring this type of behavior to light. Investigating incidents in a timely manner and taking corrective action will demonstrate the value of tips.