When it Comes to Tips, Having a Policy is Crucial

August 2014 By Scott Patterson, CFE The message is finally getting out: Tipsters may be the most unheralded front-line soldiers in the fight against fraud. More frauds are detected through tips than any other method. This has been consistently shown in the ACFE’s biennial Global Fraud Study, and the newest statistics from the 2014 Report to the Nations on Occupational Fraud and Abuse further reinforce the point. Businessweek and other major media outlets are reporting on it, too – many of them making note that other, long-depended-upon anti-fraud controls (such as external audits) are coming up short compared to tips. It is news worth sharing, as the implication is that the “see no evil, hear no evil” approach that many businesses followed for decades is now truly obsolete. To catch fraud, one must see it and/or hear about it. Then one must speak about it. “That’s great,” your executives or clients might say upon hearing this news. “So, why aren’t our phones ringing?” If only it were that simple.

August 2014

By Scott Patterson, CFE

The message is finally getting out: Tipsters may be the most unheralded front-line soldiers in the fight against fraud. More frauds are detected through tips than any other method. This has been consistently shown in the ACFE’s biennial Global Fraud Study, and the newest statistics from the 2014 Report to the Nations on Occupational Fraud and Abuse further reinforce the point.

Businessweek and other major media outlets are reporting on it, too – many of them making note that other, long-depended-upon anti-fraud controls (such as external audits) are coming up short compared to tips. It is news worth sharing, as the implication is that the “see no evil, hear no evil” approach that many businesses followed for decades is now truly obsolete. To catch fraud, one must see it and/or hear about it. Then one must speak about it.

“That’s great,” your executives or clients might say upon hearing this news. “So, why aren’t our phones ringing?”

If only it were that simple.

 

A History of Retaliation

Being a whistleblower has rarely been a smooth, pain-free endeavor. The ACFE’s own Sentinel Award is named after Cliff Robertson, the Academy-Award-winning actor who, in the late 1970s, discovered a Hollywood producer was creating phony royalty checks, forging the signatures of those for whom the checks were intended and pocketing the cash. This powerful mogul threatened Robertson, telling him that if Robertson reported him, he’d never work in Hollywood again. Robertson went forward with his report and, as a result, he was blacklisted and wasn’t hired in the film industry until years later.

Every year at the ACFE Global Fraud Conference, a whistleblower is honored for choosing “truth over self” and reporting fraud. The award winner is invited to speak, and in almost every case, the audience hears tales of how the individual was intimidated, threatened and fired – or at least demoted – as their rewards for trying to do the right thing. Robert Woodford was the first Western-born CEO of Olympus Corp. in Japan when he confronted the company’s executive board in 2011 about major accounting discrepancies. He was subsequently fired by the board for what they claimed was “a management culture clash.” Just a month later, Olympus officials publically admitted to having paid fraudulent advisory fees in a decades-long cover up valuing $1.7 billion.

Amy Stroupe, CFE, served as fraud investigator for a large regional bank in North Carolina. She uncovered a land development fraud worth millions of dollars. Her bank had unwittingly participated in the fraud by lending a questionable $20 million to duped investors; loans whose paperwork did not completely pass muster.

In 2007, Stroupe contacted the FBI about her findings. Investigators and the judge in the case say the land development in question was a Ponzi scheme.

Ultimately her investigation led to the dismissal of bank employees and guilty pleas on the part of five non-bank participants in the fraud. Stroupe was promptly rewarded for her efforts by being dismissed by the bank.

It took Stroupe three years of pursuing her own case under the protection of federal whistleblower laws to finally prevail. Her employer was ordered to reinstate her; expunge her record; and provide back pay, interest and attorney fees. The judge rejected the bank’s claims that Stroupe had released confidential information. He found that she had not been insubordinate and that the bank's other claims of grounds for the discharge were nonsensical.

These and other cases just go to show how nervous any employee may be at the mere thought of becoming a whistleblower. Every business leader should know that certain steps must be taken to foster a company culture where tips are encouraged, and fears of retaliation laid to rest. There should be an explicit reassurance that management is on their side – and not on the side of the fraudsters.

 

Create a Whistleblower Policy

“If an employee were to file an allegation, it’s important that they understand the steps that will be taken to respond to their concerns,” explained ACFE faculty member Paul E. Zikmund, CFE, Director of Global Ethics and Compliance for Bunge (a global agribusiness and food company). “And … it’s very important that we protect the whistleblower from any type of retaliation.”

If finding more fraud isn’t incentive enough, there are legal ramifications to reinforce that point. “In today’s environment, companies that retaliate against whistleblowers do face not only criminal, but civil litigation risks, in response to retaliating against those employees.”

Zikmund discussed whistleblower issues in a recent interview with the ACFE, and he described the need for a strong, written policy. He said there are three main purposes to having such a policy in place:

To encourage employees to report instances of fraud, misconduct and compliance matters within the company. 

To establish protocols for responding to those complaints or allegations.

To establish protections for the whistleblower from any type of retaliation in response to filing such allegations.

“I think that [among] companies that have a culture where retaliation is acceptable, or a common practice, I would venture to guess that the use of a whistleblower hotline is probably not very strong,” Zikmund said. “Employees who believe that they will be retaliated against will often refuse, or abstain from filing any complaints or concerns about co-workers or third parties.”

 

Allow Anonymous Reporting

Zikmund said it is strongly preferred that the reporting system provide anonymity to the tipster.

“When I look at my personal experience in dealing with whistleblower complaints, I think the statistics hold true, that about 50 percent of all allegations are made anonymously,” Zikmund said. “And for employees to feel comfortable, they have to be offered the opportunity to remain anonymous. A number of employees don’t want to express their identity or provide their identity when they file an allegation ... just for fear of retaliation or fear of other responses.”

There are specific things fraud examiners can do to try to mitigate some of the risks of retaliation against whistleblowers.

"When [an] investigation is launched, one of the things that fraud examiners should do is inform management of the company’s policy around retaliation,” Zikmund said. “So we want to make sure that managers are aware that retaliation is not acceptable. It is, in fact, against the law if you’re a public company. And it would result in a negative outcome for the investigation. So we want to make sure that we educate them right up front on what their roles and responsibilities are in response to an allegation.

“We also want to make sure that we educate the whistleblower,” Zikmund said. “We want to make sure that we inform them that if they are retaliated against by management, that they should immediately report that to the fraud examiner, or to another level of management or human resources, in order to make sure that those retaliation actions by management are addressed.”

 

Have a Response Plan

Perhaps nothing might kill a reporting system quicker than ignoring the tips that do come in – or acting in a slow or inconsistent manner. Every organization should have a process in place for reviewing all tips, gathering information on them and investigating allegations. These details should be spelled out – for instance, the timing:

“An investigation that is not conducted for 30, 60 or 90 days … people become disinterested, evidence is lost or destroyed, witnesses leave, the employee is allowed to continue perpetrating the fraud (if it is, in fact, actually happening),” Zikmund said. "So a response plan, from that perspective is very, very important.”

 

The Stark Reality

While protections for whistleblowers have come a long way, Zikmund stresses those who take on the role often still face what he calls “a bumpy road.” They should be prepared for challenges.

“Many times whistleblowers will face heavy scrutiny at work by co-workers,” Zikmund said. “Often times they might be shunned or retaliated against. Their careers might be negatively impacted. And it’s a very difficult situation to be in as a whistleblower.”

He added that it is also important for the whistleblower to bear responsibility for having their facts in order, and not make an unsubstantiated or frivolous charge. “Generally these investigations take long periods of time to finish. They may often involve outside counsel [and] even law enforcement agencies if it is a criminal event.”

One thing is certain: Companies need whistleblowers. They need that irreplaceable detection method, the tipsters who flag frauds sooner than audits, and (hopefully) before they have caused irreparable harm. Business leaders must foster an environment where these individuals don’t fear coming forward. Perhaps in the future, ACFE Sentinel Award winners and other whistleblowers will tell stories of being thanked and appreciated for their efforts rather than being shunned and ostracized.