Academic journal article Journal of Accountancy

Are Organizations Hindering Employee Whistleblowing? Attention to Detail Is Essential in Implementing Effective Fraud Reporting Programs

Academic journal article Journal of Accountancy

Are Organizations Hindering Employee Whistleblowing? Attention to Detail Is Essential in Implementing Effective Fraud Reporting Programs

Article excerpt

Losses from fraud total about 5% of annual revenues for the typical company. Employee tips are the primary way companies learn about internal fraud, with more than 40% of fraud identified via whistleblowing, according to the Association of Certified Fraud Examiners' 2014 Report to the Nations on Occupational Fraud and Abuse. From the 2002 passage of the Sarbanes-Oxley Act (SOX), EL. 107-204, to the 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203, much emphasis has been placed on increasing employees' willingness to blow the whistle on fraud. Companies that maximize their employees' willingness to report fraud in-house position themselves to learn about problems before they become bigger issues--and before employees feel the need to report them outside of the organization.

In an effort to curb fraud, companies have instituted third-party administration of ethics hotlines, and the follow-up of fraud complaints by internal audit and the audit committee. However, recent research, detailed in this article, reveals several counterintuitive aspects of whistleblowing, showing that a company's fraud reporting programs can be implemented in a way that actually decreases employees' willingness to report fraud. This article looks at actions organizations can take to avoid inadvertently discouraging fraud reporting and instead promote whistleblowing.

THIRD-PARTY ADMINISTRATORS OF HOTLINES

Using third-party administrators to oversee hotlines is considered a "best practice" that companies use to encourage whistle-blowing (see "Fraud Hotlines: Don't Miss That Call," JofA, Aug. 2013, page 32). An effective third-party setup typically includes a case management system that allows an administrator to track the complaint. From the employer's perspective, the ability to ensure employee anonymity is one of the most important perceived benefits. But does the promise of anonymity actually encourage employees to use hotlines?

A 2009 study based on interviews of more than 90 managers and published in Auditing: A Journal of Practice & Theory, found that employees are more hesitant to report possible fraud to "outsiders" as opposed to using internal company reporting programs and resources, even if those internal programs don't follow "best practices" similar to the external hotlines. This is, according to the study, because employees prefer to report wrongdoing to the organization rather than to outsiders. While hotlines run by third-party administrators are still "internal" to the organization, employees often view these external resources as reporting outside of the organization because the hotlines are not maintained by company employees.

What can companies do? Companies often want to retain the use of an external reporting system, such as a hotline administered by a third party, rather than bringing the reporting system in-house. Hotlines maintained by third parties may be more cost-effective and may offer whistleblowing reporting "best practices," but corporations that use a third-party administrator should ensure that the following is occurring:

* The hotline should be perceived as part of the company rather than as something "separate" from or outside of the organization.

* Employees need to believe that using the external reporting mechanism is the company's preferred way of reporting. Periodic reminders should be sent to employees to reinforce the use of the reporting mechanism.

* The hotline name and literature should make it clear that employees can call with any questions on ethical behavior. Research conducted by the Ethical Leadership Group and cited in an article on the Santa Clara University website showed that channels named "Hotline" or "Alert Line" receive about four calls per year per 1,000 employees, while lines with names such as "Open Line" or "Help Line" receive about 23 calls per 1,000 employees each year. …

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