Written by Nick Ciancio, Global Compliance,
Ethics hotlines, or whistleblower hotlines, are now prevalent within many organizations. While many assume that ethics hotlines were born as a result of prominent corporate scandals and the resulting Sarbanes-Oxley Act, the original compliance reporting hotline actually dates back to 1981. Global Compliance introduced the original reporting hotline and it was targeted to government defense contractors for disclosure of fraud and waste.
Section 301 of the Sarbanes-Oxley Act requires publicly traded corporations to implement procedures for confidential and anonymous submission of employee concerns regarding questionable accounting or auditing matters. However, organizations of all types, including those not mandated by the Sarbanes-Oxley Act such as private corporations, government entities, universities, and not-for-profit organizations, have also begun to implement hotline reporting systems. These hotline reporting systems are being put in place to protect the organizations and build public confidence along with the confidence of employees, customers, and stakeholders.
In reality, reporting hotlines are a very effective means of uncovering occupational fraud. The 2006 Association of Certified Fraud Examiners (ACFE) Report to the Nation shows that 34.2% of occupational fraud schemes were discovered by tips, the most common method of discovery. And, of those tips, nearly two out of three tips came from employees. Further, in the cases reviewed in the ACFE Report, organizations that had anonymous fraud hotlines suffered a median loss of $100,000 in fraud schemes, whereas organizations without hotlines suffered a median loss of $200,000.1 This data, therefore, supports the use of hotlines as a fraud detection tool.
However, while hotlines serve as an important source of information intake, hotlines are just one key element within an effective ethics and compliance program. While it’s one thing to provide a vehicle for information intake, it’s equally important to educate employees on an organization’s core values, relevant industry regulations, key legislation, and organizational processes and procedures, along with expected behaviors. This said, a thorough Code of Conduct, employee training, and ongoing employee communications each become a critical part of building an ethical business culture. These elements integrated with a hotline and web reporting system enable an organization to protect itself from financial, legal, and reputational harm. Lastly, with all of the key elements in place, it then becomes important to regularly measure and validate employee comprehension, as well as overall perception of the work environment and culture.
Recent high visibility scandals in a multitude of industries and sectors have made occupational fraud top of mind. Today, we’re seeing organizations including ethical risk in their overall risk assessment efforts, and high-level ethics and compliance functional positions directly reporting to the CEO and the Board of Directors established within organizations. No doubt, occupational fraud is not a new trend in today’s business world, but rather has been prevalent for years. However, the enactment of the Sarbanes-Oxley Act of 2002 followed by amendments to the Organizational Sentencing Guidelines in November of 2004 has raised the stakes for organizations of all types – public and private corporations, government entities and not-for- profit organizations. Accountability at all hierarchical levels is now mandated and mindsets are evolving. Perhaps in near time we’ll see businesses fully recognizing that ethical business is good business and the only responsible approach with respect to employees, customers, and stakeholders.
1 2006 ACFE Report to the Nation on Occupational Fraud & Abuse