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Figure 11: Initial Detection of Occupational Frauds
As Figure 11 demonstrates, tips are consistently the most common detection method for cases of occupational fraud by a significant margin, which has been an observed trend since we first began tracking this data in 2002. Management review and internal audit follow tips, which was also true for the 2010 and 2012 reports.
Figure 13: Source of Tips
It is well known that employees are a valuable source of information for discovering potential fraud, and Figure 13 shows that employees were the source of almost half of all tips that led to the detection of fraud. Occupational fraud has a negative impact on an organization, including those who work for it, which might explain why employees so often step forward. At the same time, there is often a risk of backlash for whistleblowers, which might explain why a substantial amount of tips came from anonymous parties (14.6%).
The fact that more than half of all tips involved parties other than confirmed employees emphasizes the importance of cultivating tips from various sources. For example, many employers circulate a whistleblower policy or fraud hotline information to employees only, but our data indicates that it is also advantageous to educate vendors, customers, and owners/shareholders on how to report suspicions of fraud.
Figure 14: Impact of Hotlines
The presence of a reporting hotline had a substantial impact on the initial fraud detection method in the cases we analyzed. Tips were the most common detection method for organizations with and without hotlines, but the benefit was much more pronounced in organizations with them (see Figure 14).
For organizations without hotlines, the reduced detection through tips resulted in other forms of detection being more prominent. Several detection methods tend to be associated with higher median losses and increased median duration. Some of these less-effective means of detection - by accident, notification by law enforcement, and external audit - were more than twice as common in organizations without hotlines.
Although many of the cases in which we are interested may not necessarily be considered "fraud," it could be expected that the same reporting and whistleblowing mechanisms unearthing fraud within the organization would similarly unearth any potentially damaging issue facing the organization.
A Brief View of Organizational Practices to Facilitate Whistleblowing
Credit: From Ravishankar, 2003:
Steps for Creating a Whistleblowing Culture
Create a Policy
A policy about reporting illegal or unethical practices should include:
Formal mechanisms for reporting violations, such as hotlines and mailboxes.
Clear communications about the process of voicing concerns, such as a specific chain of command, or the identification of a specific person in the organization, such as an ombudsman or a human resources professional.
Clear communications about bans on retaliation.
In addition, a clear connection should exist between an organization's code of ethics and performance measures. For example, in the performance review process, employees can be held accountable not only for meeting their goals and objectives but also for doing so in accordance with the stated values or business standards of the company.
Get Endorsement From Top Management
Top management, starting with the CEO, should demonstrate a strong commitment to encouraging whistleblowing. This message must be communicated by line managers at all levels, who are trained continuously in creating an open-door policy regarding employee complaints.
Publicize the Organization's Commitment
To create a culture of openness and honesty, it is important that employees hear about the policy regularly. Top management should make every effort to talk about the commitment to ethical behavior in memos, newsletters, and speeches to company personnel. Publicly acknowledging and rewarding employees who pinpoint ethical issues is one way to send the message that management is serious about addressing issues before they become endemic.
Investigate and Follow Up
Managers should be required to investigate all allegations promptly and thoroughly, and report the origins and the results of the investigation to a higher authority. For example, at IBM, a long-standing open-door policy requires that any complaint received must be investigated within a certain number of hours. Inaction is the best way to create cynicism about the seriousness of an organization's ethics policy.
Assess the Organization's Internal Whistleblowing System
Find out employees' opinions about the organization's culture vis-à-vis its commitment to ethics and values. For example, Sears conducts an annual employee survey related to ethics. Some questions are: Do you believe unethical issues are tolerated here? Do you know how to report an ethical issue?
