Fraud Hotlines

An effective hotline is clearly an important means of detecting fraud. More importantly, it is an effective means of shortening the duration of a fraud. According to the ACFE’s 2010 Report to the Nations on Occupational Fraud and Abuse, more than 40% of frauds are detected via tip-nearly three times more than by any other detection method-and two-thirds of those tips were made through fraud hotlines. In addition, a well publicized and widely supported hotline can also have a preventative effect; thus, by giving all employees a clear and secure way to report any suspected wrongdoing, an effective reporting mechanism can increase the fraudster’s perception that he or she will be caught and might deter him or her from commencing the scheme.

Organizational Control Environment

An organization’s control environment sets the moral tone of the organization and includes the integrity, ethical values and competence of the entity’s employees, as well as management’s philosophy and operating style. If the tone set by management is poor; if the owners, executives and managers exhibit less-than-ethical conduct, employees at lower levels in the organization will see that such activities are tolerated and will be more likely to engage in unethical, or even fraudulent conduct. As part of establishing an effective control environment, its is highly recommended that a written code of conduct is in place, which covers all employees, but emphasizes that, while the offical policy should reflect desired conduct, corporate culture will determine what occurs. Consequently, in addition to instituting formal policies covering employee conduct, management must do the following:

  • Lead by example
  • Verbally communicate the entity’s values and standards to all employees
  • Establish and enforce penalties for improper conduct
  • Ensure that jobs are staffed by employees with requisite knowledge and skills
  • Establish appropriate reporting lines
  • Set human resources policies that ensure the organization hires, promotes and supports competent and trustworthy individuals

Employee Anti-Fraud Training

Because employees are on the frontline to observe suspicious acts by their fellow staff members, employee anti-fraud education is the cornerstone of an effective fraud prevention program. Without training about how fraud hurts the organization and it’s staff, what constitutes fraud, how to identify the red flags of fraud, how to report any suspected wrongdoing, and the consequences of fraudulent actions, many employees might miss; or even willingly turn a blind eye to the warning signs of theft and misconduct. To be most effective, such training should be based on the realities of the organization, rather than on generic anti-fraud messagesthat provide no real applicable value, and should be ongoing with refresher training held at least annually. Additionally, while employees at all levels should be required to participate in the anti-fraud training program, managers and executives should be provided with supplemental training that addresses the added fraud prevention and detection responsibility provided by their positions of authority.

Three things every small business owner “must do” to lower their risk of fraud

First of all, a Fraud Risk Checkup for your business is mandatory. You go to the doctor for checkups don’t you? Then why are you neglecting to have your business checked for it’s risk of fraud? Second, Anti-Fraud Education should be instilled in every employee who works for the company. Knowing how to identify the red flags of fraud before the fraud occurs can drastically lower your fraud risk. And thirdly, have a system to anonymously report fraud for your employees, vendors and customers. There are plenty of third parties that offer this service, and Fraud Investigative Services, LLC offers a low-cost option of making this service available to your organization.

Why do you need a fraud hotline or reporting service?

It’s a fact. Small businesses (businesses with <100 employees) lose on average, 5% of their revenues to fraud. Out of all the anti-fraud controls that a business may have to deter fraud, the most important control, which most small businesses seem to ignore, is their honest employees. Employees are the eyes and ears of the company and most employees would choose to report fraud or wrongdoing if they had knowledge of it. However, many employees are fearful to report fraud or wrongdoing directly to management for fear of reprisal, retribution or loss of their job. With an anonymous and confidential reporting system, employees can report fraud or wrongdoing anonymously to a neutral third party, thereby removing their fear and apprehension. Over 40% of all frauds are detected by anonymous tips. Having a fraud reporting system sends a message to employees, as well as vendors and customers that management takes fraud very seriously and has zero tolerance for it. A fraud reporting system also has the effect of instilling the presence of a “watchdog” within the organization. Employees are far less likely to commit fraud or wrongdoing against their employer if they perceive that they may be detected. Lastly, if fraud is already taking place in the organization, a fraud reporting system can drastically shorten the duration of the fraud. If you consider that the average fraud in a small business lasts 12 to 18 months and the average loss is in excess of $200,000, a company could end up saving many thousands of dollars in losses.

Catch the warning signs of fraud in non-profit organizations

With their high fund-raising activities and performance goals, and volunteers handling money and keeping accounting records, non-profit organizations can be prime targets for fraud. Below are some of the red flags to watch for:

  • Budget cutbacks
  • High turnover
  • Refusal to take legitimate perks
  • Overemphasis on short-term fundraising goals
  • Poorly monitored supervision and controls
  • Bounced checks
  • Things don’t add up
  • Anonymous tips
  • Lifestyle or behavior changes
  • Inattention to details
  • Failure to conduct background checks on those  handling money
  • Keeping problems a secret
  • Failing to investigate and prosecute offenders

FRAUD PREVENTION QUICK CHECKLIST

Do you need to size up how vulnerable your company might be to fraud? Ask the following questions!

  1. IS ONGOING ANTIFRAUD TRAINING PROVIDED TO ALL EMPLOYEES OF THE ORGANIZATION? Y/N
  2. DO EMPLOYEES UNDERSTAND WHAT CONSTITUTES FRAUD? Y/N
  3. HAVE THE COSTS OF FRAUD TO THE COMPANY BEEN MADE CLEAR TO EMPLOYEES? Y/N
  4. HAS A POLICY OF ZERO TOLERANCE FOR FRAUD BEEN COMMUNICATED TO EMPLOYEES THROUGH WORDS AND ACTIONS? Y/N
  5. IS AN EFFECTIVE FRAUD REPORTING SYSTEM IN PLACE, SUCH AS A THIRD PARTY HOTLINE? Y/N
  6. HAVE EMPLOYEES BEEN TAUGHT HOW TO COMMUNICATE CONCERNS ABOUT KNOWN OR POTENTIAL WRONGDOING AND WHERE TO SEEK ADVICE WHEN FACED WITH CERTAIN UNETHICAL DECISIONS? Y/N
  7. DO EMPLOYEES TRUST THAT THEY CAN REPORT SUSPICIOUS ACTIVITY ANONYMOUSLY AND/OR CONFIDENTIALLY AND WITHOUT FEAR OF REPRISAL? Y/N
  8. HAS IT BEEN MADE CLEAR TO EMPLOYEES THAT REPORTS OF SUSPICIOUS ACTIVITY WILL BE PROMPTLY AND THOROUGHLY EVALUATED? Y/N
  9. DOES THE ORGANIZATION SEND THE MESSAGE THAT IT ACTIVELY SEEKS OUT FRAUDULENT CONDUCT THROUGH FRAUD RISK ASSESSMENTS? Y/N
  10. ARE SURPRISE FRAUD AUDITS PERFORMED IN ADDITION TO REGULARLY SCHEDULED FRAUD AUDITS? Y/N
  11. IS THE MANAGEMENT CLIMATE AND TONE AT THE TOP ONE OF HONESTY AND INTEGRITY? Y/N
  12. ARE EMPLOYEES SURVEYED TO DETERMINE THE EXTENT TO WHICH THEY BELIEVE THAT MANAGEMENT ACTS WITH HONESTY AND INTEGRITY? Y/N
  13. HAVE FRAUD PREVENTION GOALS BEEN INCORPORATED INTO THE PERFORMANCE MEASURES AGAINST WHICH MANAGERS ARE EVALUATED? Y/N
  14. HAS THE ORGANIZATION ESTABLISHED, IMPLEMENTED AND TESTED A PROCESS FOR THE OVERSIGHT OF FRAUD RISKS BY THOSE CHARGED WITH CORPORATE GOVERNANCE? Y/N
  15. ARE FRAUD RISK ASSESSMENTS PERFORMED TO PROACTIVELY IDENTIFY AND MITIGATE THE ORGANIZATION’S VULNERABILITIES TO INTERNAL AND EXTERNAL FRAUD? Y/N
  16. ARE THE FOLLOWING ANTIFRAUD CONTROLS IN PLACE AND OPERATING EFFECTIVELY?
    1. PROPER SEGREGATION OF DUTIES? Y/N
    2. USE OF AUTHORIZATIONS? Y/N
    3. PHYSICAL SAFEGUARDS? Y/N
    4. JOB ROTATION? Y/N
    5. MANDATORY VACATIONS? Y/N
    6. DOES THE INTERNAL AUDIT DEPARTMENT HAVE ADEQUATE RESOURCES AND AUTHORITY TO OPERATE EFFECTIVELY AND WITHOUT UNDUE INFLUENCE FROM SENIOR MANAGEMENT? Y/N
    7. DOES THE HIRING POLICY INCLUDE THE FOLLOWING?
      1. PAST EMPLOYMENT VERIFICATION AND REFERENCE CHECKS? Y/N
      2. CRIMINAL, CREDIT AND BACKGROUND CHECKS? Y/N
      3. DRUG SCREENING? Y/N
      4. EDUCATION VERIFICATION? Y/N
      5. ARE EMPLOYEE SUPPORT PROGRAMS IN PLACE TO ASSIST EMPLOYEES STRUGGLING WITH ADDICTION, MENTAL/EMOTIONAL HEALTH, FAMILY OR FINANCIAL PROBLEMS? Y/N
      6. IS AN OPEN DOOR POLICY IN PLACE THAT ALLOWS EMPLOYEES TO SPEAK FREELY ABOUT PRESSURES, PROVIDING AN OPPORTUNITY TO ALLEVIATE SUCH PRESSURES BEFORE THEY BECOME ACUTE? Y/N

Fraud Prevention Training

Ever heard the phrase, “knowledge is power?” In most cases, having more knowledge enables us, as human beings, to deal more effectively with situations. That said, I wanted to talk about something that is becoming increasingly important in the fight against employee fraud. Anti-fraud education, or what we at Fraud Investigative Services call it, Fraud Prevention Training. This is a comprehensive, 8 lesson course that teaches the fundamentals of how small businesses are victimized by employee fraud and how they can protect themselves from it. The two major reasons that small businesses are especially vulnerable to employee fraud, are: 1) Organizations with few employees often lack basic accouting controls, and 2) There is a high level of trust that exists in small organizations, therefore, employees and management tend to be less alert to the possibility that fraud may be occurring. Fraud Prevention Training can go a long ways towards increasing the odds that employee fraud will be discovered early on, as employees will be more vigilant and aware of the red flags of fraud.

Reporting fraud confidentially

Statistics have shown that approximately 46% of all internal frauds are reported or brought to the attention of company management by employee or insider tips. Given that information, doesn’t it make sense to have a reporting mechanism in place for employees to report suspicious or errant behavior, without fear of retribution or retaliation? Sadly, most companies do not have such a process in place. At Fraud Investigative Services, we are giving consideration to offering such a service as a neutral third party in the form of a 24 hour hotline.  I would like to hear some comments about whether such a service would be of interest.

Workplace fraud: the truth

  • Fraud, by its very nature, does not lend itself to being scientifically observed or measured in an accurate manner. One of the primary characteristics of fraud is that it is clandestine, or hidden; almost all fraud involves the attempted concealment of the crime.
  • Certified Fraud Examiners estimate that seven percent of revenues are lost as a result of occupational fraud and abuse. Applied to the U.S. Gross Domestic Product, this translates to losses of approximately $994 billion or about $6,000 per employee.
  • All occupational frauds fall into one of three categories: asset misappropriations, corruption, or fraudulent financial statements.
  • Occupational frauds were most often committed by the accounting department or upper management.