12. Dial ‘F’ for Fraud: The Benefits of an Ethics Hotline

Managing your company’s risk is a tricky business. Companies and investors try to protect themselves from the mammoth-sized Madoff fraud on one end of the spectrum to more common smaller-scale frauds, such as vendors/subcontractors with ulterior motives; officers who engage in sexual harassment, theft of intellectual property, or embezzlement; and rogue traders who deceive their superiors and breach company policies. Even if you conduct a background check on every employee who walks through your company’s doors, how do you know you are not susceptible to some form of fraud?

In 2009, the Association of Certified Fraud Examiners announced the results of a study that said that corporate fraud is on the rise, and a majority of the fraud cases they studied were caused by employee embezzlement. If the fraud is occurring from within, then you need to find a way to identify that internal fraud before it is too late. Whistleblower hotlines are one of many vehicles that companies rely on to help mitigate internal fraud.

The term “whistleblower” has gained some momentum. Companies, both public and private, have been discussing the merits of whistleblower hotlines, and the American Recovery and Reinvestment Act of 2009 includes a provision about whistleblowers. But what are the benefits of a whistleblower hotline? How do companies implement them? And do these hotlines mitigate your exposure to fraud?

The Situation: The Spread of Swindlers

An investor in large retail stores called and said he knew that he was being defrauded, but because of the size of the 100+ retail store operation, he was not sure where the fraud began and where it ended. We then met with the investor and the board of directors and decided to conduct a multi-pronged investigation.

First, we dispatched a fleet of forensic accountants and surveillance experts in the cities where the company maintained stores. These professionals developed intelligence on suspicious in-house managers and outside vendors, and engaged in other investigative and research activities to help identify the root of the problem.

Through these efforts, it was discovered that the fraud was rampant. Our surveillance team discovered that the night before a last minute surprise audit, certain employees would enter the store at midnight and fill the store with all of the required merchandise so that the audit did not reveal any missing items or suspicious activities. And then the employees would remove the merchandise after the audit was completed.

Kickbacks, self-dealing, and misrepresentations were happening in almost every store throughout the chain and also on the corporate level. We decided that the next step in the investigation was to identify the origin of the cancer before it metastasized.

The Tactic: Hotline Help

To solve the problem, we decided to implement an anonymous tip-line (available both via telephone and email) in the headquarters and in all of the stores. The CEO explained to the convenience store employees that any concerns, complaints, or frustrations could be voiced, anonymously, through the toll-free number or email address. Within one week, 12 employees called, emailed, and told us various stories of suspicious activities that they had witnessed. Through these employee accounts, we were able to identify and document the sources of the fraud and assist the investors in implementing new corporate policies of checks and balances to prevent further instances of malfeasance.

Prime Time Whistleblowers

This is not the first time anonymous tips have helped bring to light internal corporate dilemmas. We all know the stories of the famed whistleblowers: Sherron Watkins of Enron and Coleen Rowley of the FBI. Yes, in both of these instances the damage was already done, and the whistleblowing was on a larger, highly publicized scale. Nonetheless, many companies and agencies have found anonymous reporting mechanisms to be helpful, especially when they are implemented before an incident.

Most recently in 2008, a whistleblower was the one who came forward and exposed the $3.5 billion Ponzi scheme run by Thomas Petters and Petters Company, Inc. In fact, the whistleblower who out-ed Petters was one of Petters’ most trusted associates. What unraveled was a complicated investigation that resulted in the October 2008 arrest of Thomas Petters. In December 2009, Petters was convicted of 20 counts of mail and wire fraud, conspiracy, and money laundering.

Construction sites have toll-free numbers available so subcontractors can anonymously report wrongdoing. Colleges and universities have blue phones throughout the campus so students can report suspicious activity. Whistleblower hotlines meet the needs of both the employees and the board members when they are properly implemented and serve as a system of checks and balances. This includes maintaining anonymity for all complaints filed through the hotline and ensuring that an independent third party is responsible for receiving and reviewing the complaints. Employees are less likely to report suspicious activities when they feel their names are known and/or they know the person to whom they are reporting the complaint. Further, it is easier for employees to report their complaints to a live person rather than to leave a voicemail message (a fact that is supported by the findings of the Association of Certified Fraud Examiners). When you have an independent third party monitor the hotline, employees are encouraged to speak freely, and there is no suggestion of impropriety. Hotlines should also have multilingual capabilities and be available 24 hours a day, 7 days a week, as most complaints come in after office hours.

In addition to being a preventive measure, whistleblower hotlines also help companies from a public relations perspective. Companies that already have ethics hotlines and code of ethics policies in place are more attractive when being sold because investors view these programs as ideal compliance tools and modern-day suggestion boxes. Also, these hotlines are in compliance with Sarbanes-Oxley. If a hotline is in place and an employee alleges misconduct, such as sexual harassment, then the board of directors and executives of the company have the recourse of asking the employee why these complaints were not called into the hotline and thus question the accuracy of the allegations.

Introducing a whistleblower hotline in the workplace is no longer viewed as a “big brother” move that trumps office morale. Whistleblower hotlines send a message to employees that the executives, investors, and board members care about the professional experience and employee tenure at the company. The hotline fosters an increase in loyalty and a team mentality among company employees. For the investors and board members, the whistleblower hotline provides direct access to the office culture and the daily occurrences of any given company. And, of course, there is that added bonus of preventing fraud, which is often a major incentive.