Fraud Hotlines — Effective Fraud Deterrents
By Dave Wells
Fraud & Investigative Services
Universal Advisor , 2004 Issue No. 2


According to the association of Certified Fraud Examiners, the average fraud scheme lasts about 18 months before discovery; moreover, U.S. businesses lose more than 6 percent of revenues each year due to occupational fraud and abuse.

Small and large businesses alike suffer losses at the hands of dishonest employees, contractors, and vendors every day. Companies are continually seeking ways to battle fraud within their organizations. Their best defense? Installing a fraud hotline — the most powerful weapon in fraud detection — as approximately 30 percent of activities are discovered via anonymous sources. While 30 percent may not appear particularly significant, it’s a much better alternative that relying on the second most common method of discovery — pure accident.

Who Can Benefit?

Section 301 of The Sarbanes-Oxley Act of 2002 requires public companies to set up a confidential, anonymous reporting system so that employees may report misconduct. Although the Act only pertains to public companies, the crimes it strives to protect against — embezzlement, collusion, and conflicts of interest — affect all organizations. Small businesses, schools, hospitals, not-for-profits, and even churches are in need of a proactive vehicle to help reduce these violations and instill confidence in their institutions. A fraud hotline encourages staff to report wrongdoing that otherwise may go undetected.

How Does It Work?

Once a hotline is in place, employees tempted to defraud an organization may begin to have second thoughts. Moreover, as the hotline starts to reveal employees and others who participate in fraudulent activities, deterrence begins to play a significant role. Hotlines can help secure a company’s future by further identifying and deterring control weaknesses before they’re allowed to escalate.

The Importance of Confidentiality

Hotlines can be answered internally; however, the ability to report incidents anonymously is essential to the success of any hotline. For this reason, many organizations are using outside, third-party providers that afford staff confidentiality, offering secure, web-based reporting as well as 24-7 phone banks. Additionally, most external providers don’t record caller or computer identification capabilities, and gender-specific titles aren’t used when referring to reporters.

Don’t Wait Until It’s Too Late

The most common method of fraud detection is a tip by an employee, customer, vendor, or anonymous source. A hotline is the most effective way for employees to anonymously report activities of wrongdoing that otherwise may go undetected. Early action may minimize an organization’s loss or mitigate the circumstances if the company itself is charged with wrongdoing due to an employee’s actions. Without an employee hotline, organizations are left to discover fraud the old fashioned way — accidentally.