February 2009
Combating Fraud – Whistleblower Hotlines
By Kimberly Sanzone
The purpose of this article is to
provide information to small and mid-size businesses and
tax-exempt organizations about the effectiveness of
whistleblower programs as a fraud detection and prevention
tool.
According to the Association of
Certified Fraud Examiners’ (ACFE) 2008 Report to the Nation
on Occupational Fraud & Abuse, “tips continue to be the most
effective means of detecting fraud.” The Association goes
on to say “…organizations could improve their detection
efforts by establishing formal structures to receive reports
about possible fraudulent conduct.” One of the most
practical ways to improve fraud prevention and detection is
by implementing a hotline.
Data consistently shows that
hotlines are one of the most effective fraud prevention
tools.
Public companies are required under the
Sarbanes-Oxley Act to have a formal reporting mechanism,
such as a hotline. For public companies however, the focus
is on fraudulent financial reporting because of the
underlying importance of protecting the investor. It is
essential that investors have accurate and reliable
information in order to make informed investment decisions.
While the focus of public companies is
on financial reporting, for small to medium-sized private
companies and non-profit organizations, the focus is usually
on protecting against the misappropriation of assets.
One of the most common types of fraud
is asset misappropriation - essentially the stealing or
misusing of an organization’s resources. The following are
three of the more common sub-categories of asset
misappropriation and examples as to how they might occur:
·
Billing schemes – An employee creating a shell
company and billing for nonexistent services or an employee
submitting invoices for payment for personal purchases.
·
Check tampering – Using company checks, an
employee transfers funds to his own account, or an employee
steals outgoing checks to deposit in his own bank account.
·
Cash on hand misappropriations –An employee
simply steals cash from a vault or safe.
To be effective the program generally
involves carefully thought out elements associated with the
dissemination of information of whistleblower reports,
accessibility of the system to the whistleblower,
confidentiality of the whistleblower’s identity and training
of those charged with the responsibility to receive and act
upon information provided by the whistleblower.
In its Compliance Guidance publication
for nursing facilities, the Department of Health and Human
Services’ Office of Inspector General (OIG) indicated that
organizations should have a compliance officer to handle
reported problems, implying that only one person can be
responsible for accumulating and addressing information
obtained through hotlines.
Other authoritative sources have
indicated that that might not be enough. Instead, the idea
of dual dissemination has proven to be a much more effective
way of assuring that complaints do not get overlooked. Dual
dissemination involves having a qualified individual - in
addition to the investigative unit - obtain duplicates of
all hotline events.
Other important features of any
hotline are its accessibility and confidentiality. The most
ideal setup is a hotline that offers 24/7 accessibility and
is provided by a third party. By using a third party,
callers are more likely to share information. Third party
access 24/7 helps to avoid the uneasiness callers may feel
when a hotline goes to voicemail after business hours.
Internal hotlines simply don’t offer this same level of
accessibility and confidentiality.
The importance of third party access
24/7 was reiterated in an article from the Institute of
Internal Auditors’ Internal Auditor magazine, written
by Dave Slovin. Slovin mentioned that according to research
by a workplace reporting services firm, “nearly 50
percent of all hotline calls are made at night or on
weekends.”
Another key reason many people choose
to use a third party is because employers can receive
assurance that the hotlines are staffed with trained
interviewers. As Slovin pointed out, “these people will
have specialized training to help callers remain calm, cover
the concern thoroughly, and use a standardized interview
process.” All of these things are very important in order
to ensure that the call will be handled as efficiently as
possible.
According to Slovin, “internal
auditors will receive better information if a trained
interviewer is available to ask the questions any time of
day or night.”
Several companies offer external
hotline services. While we cannot endorse any particular
company, the following has been compiled from information
supplied by the respective company. The information was
deemed valid when supplied.
·
Lighthouse Services provides anonymous
hotline services. Prices start at $525 a year and increase
based on client size and needs.
Andy Brownstein
(215) 884-6150
andy@lighthouse-services.com
http://www.lighthouse-services.com/index.html
·
The Network uses software and call
center systems to deliver 24/7 hotline services. Prices are
based specifically on number of employees and individual
client needs. The company did not supply pricing examples.
Melissa Lawson
(678) 248-7244
melissalawson@tnwinc.com
http://www.tnwinc.com/default.asp
·
Report it Systems offers 24/7 hotline
phone and web-based services. The average annual price for
small and mid-sized clients is $1,200. Non-profit
organizations receive discounted prices.
Anthony Lavalle
(631) 337-2258
alavalle@reportit.net
http://www.reportit.net/default.asp
·
SilentWhistle uses both web and
phone-based technology to provide anonymous hotline
services. Prices start at $1,000 a year and vary depending
on the amount of service desired and size of the client.
Chris Cottle
(801) 617-8034
chris.cottle@allegiance.com
http://www.allegiance.com/silentwhistle/
So while any organization is subject to
fraudulent activity, the good news is that there is plenty
you can do to help prevent it.
If you would like more information on
how we can assist your organization design and implement a
whistleblower system or assess the effectiveness of your
current system, please contact James E. Traester, LLC, CPA at
203.932.2931.
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