Most frauds are found through tips and most tips come through hotlines. Here are some suggestions if you're beginning a hotline for the first time.  

One of the many effects of the Sarbanes-Oxley Act of 2002 is that thousands of public companies are now considering offering their employees anonymous hotlines. This is an important step toward minimizing losses due to fraud. Respondents to the survey that formed that basis of the 2002 ACFE Report to the Nation, said that fraud was detected by tips 46 percent of the time, which made tips the leading method for detecting fraud. The study also found that companies with fraud hotlines cut their losses by approximately 50 percent per scheme presumably because the fraud was discovered faster through the tips.

While internal audits, external audits and background checks also significantly reduced losses, the greatest reduction in loss was associated with anonymous reporting mechanisms, such as a hotline.

Beyond the obvious financial benefit of stopping fraud in its early stages, a hotline, such as EthicsLine, endorsed by the ACFE, can give a company the opportunity to limit liability of offenses such as discrimination. Also, uncovering and dealing with issues long before they are exposed in the media can protect a company from the destruction of goodwill in the eyes of investors, customers, and other stakeholders.

If you're preparing to implement your first hotline, there are many actions that you can take to maximize its effectiveness.

Communicate to employees about behaviors that aren't acceptable, and how to report them. A comprehensive program includes periodic communication to employees and others about the behaviors that are acceptable and unacceptable. This communication should include everything from articles on the company intranet site to posters in break rooms to discussions at company meetings. This type of communication reinforces the recipient's perception that the company wants to uncover illegal and unethical activities and address them.

Encourage employees to use internal channels, but let them know they can remain anonymous by using the hotline. Analysis of more than 47,000 incidents reported via hotline calls in 2002 showed that 48 percent of callers chose to remain anonymous. (Source: The Network Inc. internal data) This number may seem high, but it may be explained by another statistic: 33 percent of hotline callers previously had reported the incident to management.

The implication is that although the employee reported an incident, his or her manager either failed to follow up, or the employee wasn't happy with the results. Take the case in which the caller's own manager is involved in the cover-up of serious misconduct. The anonymous report gives the company a chance to intervene in a potentially volatile situation, possibly preventing a costly lawsuit. An entity that's serious about preventing fraud will make every effort to give people an option for reporting that makes them comfortable. In response to Sarbanes-Oxley, some companies are adding a third-party hotline in addition to an internal hotline to make sure they have given employees every avenue for reporting malfeasance to the company rather than contacting an outside party like a lawyer or the media.

Have a trained interviewer handling the call. There is no substitute for human interaction when dealing with an anonymous caller, because there may never be another chance to gather information. An anonymous caller typically feels threatened, and is in an emotionally charged state, leading him or her to leave out important details. A professionally trained interviewer will ask questions that help the company gain enough information to be able to investigate the allegation.

To illustrate: A caller can leave a message on an answering machine or through a Web site email form that says, "My manager is ripping off the company. He's stealing a lot of money. You need to stop him." If the company has thousands of employees, there may not be a practical way to follow up on this tip.

However, if this same person called a hotline, the trained interviewer would ask several questions such as the location, the manager's name, how the theft is occurring, how often it occurs, the dollar value involved, if there other witnesses, etc.

The interviewer's goal is to create a thorough, detailed report so the company can investigate the allegation. Probing for details is what transforms a tip into an actionable report, and this opportunity is lost without a live operator.

Offer professional service 24 hours a day. Many employees call hotlines outside regular business hours. An employee who wishes to remain anonymous won't feel comfortable calling from work. Typically, he or she will make the call from home at night or over the weekend. A trained interviewer “rather than an answering machine“ needs to handle every call at any time of the day or night.

Make the hotline available to all your corporate communities, not just employees. To be most effective, a hotline program must be comprehensive, involving employees, suppliers, investors, and customers. Different groups of people, like vendors, may be aware of different types of fraud. For example, employees of vendors might report fraud in the form of over-billing, while others may report other types of fraud. One way to reach the accounting employees of your suppliers is by printing the hotline number on the checks you cut.

Create a plan that ensures that reports are sent to the right people. A report dissemination routine should be set up with the hotline administrator so that issues like harassment are sent to human resources and/or legal departments, while issues like those mentioned in the Sarbanes-Oxley Act are sent an appropriate representative of the audit committee, as well as to the hotline administrator. Your hotline should include complaint topics that specifically address Sarbanes-Oxley such as insider trading, improper loans to executives, retaliation against whistle-blowers, conflict of interest, and accounting irregularities. This dissemination routine lets everyone know that you have done everything you can to comply with the spirit of Sarbanes-Oxley and you are dedicated to managing an ethical corporation.

Tony Malone, ARM, CPCU, is chief executive officer of The Network Inc., which manages EthicsLine, endorsed by the ACFE. Malone holds the Associate in Risk Management (ARM) and Chartered Property & Casualty Underwriter (CPCU) professional designations. 

Report to the Nation: Fraud Hotlines Cut Losses by About 50 Percent per Scheme

These statistics are from the ACFE's Report to the Nation. The entire report is available for downloading at www.CFEnet.com.

• Organizations with fraud hotlines cut their fraud losses by approximately 50 percent per scheme. Internal audits, external audits, and background checks also significantly reduce fraud losses.
• Small businesses are the most vulnerable to occupational fraud and abuse. The average scheme in a small business causes $127,500 in losses. The average scheme in the largest companies costs $97,000.
• The most common method for detecting occupational fraud is through tips from employees, customers, vendors and anonymous sources. The second most common method of discovery is by accident.
• The typical occupational fraud perpetrator is a first-time offender. Only 7 percent of occupational fraudsters in this study were known to have prior convictions for fraud-related offenses.

Top Ten Concerns Reported to EthicsLine

Following are the percentages of the types of calls to EthicsLine from January through August of 2003:

• Theft: 22 percent
• Discrimination: 16.1 percent
• Wage discrepancies: 13 percent
• Sexual harassment: 5.8 percent
• Customer relations: 5.7 percent
• Employee relations: 5.0 percent
• Workplace violence: 4.9 percent
• Fraud: 4.8 percent
• Safety concern: 4.7 percent
• Falsification of records: 4.4 percent