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.

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.

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.