“Organizations that had reporting hotlines were much more likely to detect fraud through tips than organizations without hotlines [were].” (ACFE, 2016)

In its 2016 Report to the Nations on Occupational Fraud and Abuse (see link below), the Association of Certified Fraud Examiners (ACFE) reaffirmed the value of ethics and compliance hotlines in the effort to detect fraud. The report provides details of ACFE’s 2015 Global Fraud Survey, presented to its base of Certified Fraud Examiners. In the report, you will find details about the cost of occupational fraud, how such fraud is committed, methods for detecting fraud, information about the impact on organizations and about the perpetrators, and more, including a fraud prevention checklist.

This blog post will focus on the report’s conclusions about tips as a method for detecting fraud.

As reported by survey participants, tips in general, from employees or others, were the most common means for detecting fraud but those organizations with reporting hotlines were more likely to detect fraud through tips than organizations without hotlines (47.3% compared to 28.2%, respectively).  Organizations that experienced fraud with a hotline in place had a median monetary impact that was half the monetary impact of those organizations with no hotline.

While telephone hotlines remain the most common single reporting mechanism, email and web-based or other online forms are also used. Combined, they make reporting through the internet more common than telephone reporting.

As stated, tips remain the most common method for detecting occupational fraud schemes. Internal audit and management review accounted for the second- and third-most common detection methods.

Active/ Passive*	Detection Method	Percent
Both	Tips	39.1%
Active	Internal Audit	16.5%
Active	Management Review	13.4%
Passive	By Accident	5.6%
Active	Account Reconciliation	5.5%
Both	Other	5.5%
Active	Document Examination	3.8%
Both	External Audit	3.8%
Passive	Notified by Law Enforcement	2.4%
Active	Surveillance/Monitoring	1.9%
Active	IT Controls	1.3%
Passive	Confession	1.3%

*Passive or active approach by the organization

It is important for organizations to put into place a variety of methods for detecting and preventing fraud, particularly active methods. According to ACFE, fraud schemes that are detected through active methods tend to be caught sooner and cause smaller losses than schemes that are detected through passive methods.

Tips, which are the most common means for detecting fraud, could be considered a passive approach, “but organizations that effectively promote reporting mechanisms actively cultivate such tips.”

With regard to tips, the ACFE 2016 Report to the Nations notes that employees, who provide 51.5% of all tips, are the focus of reporting mechanisms at most organizations. That means that 48.5% of tips come from other sources (customers, 17.8%; anonymous, 14.0%; other, 12.6%; vendors, 9.9%; shareholders/owners, 2.7%; and competitors, 1.6%), but organizations too often do not focus their efforts on these potential sources of information.

Organizations will increase the likelihood of receiving tips about possible fraud or other wrongdoing when they set up their hotlines or other reporting mechanisms to receive tips from a broad swathe of potential sources and when they promote those hotlines and services across that broader audience.

Ethical Advocate has addressed the topic of promoting hotlines several times before. If you are interested in introducing or enhancing a hotline process for your organization, contact us for more information.

References:

ACFE, Report to the Nations on Occupational Fraud and Abuse: 2016 Global Fraud Study, 2016. http://www.acfe.com/rttn2016.aspx