Corporate whistleblowers – the front-line defence against fraud

February 2013 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

The path taken by a whistleblower can be a long and difficult one.

When an employee makes the decision to expose fraudulent behaviour, it often comes with many risks: alienation from one’s co-workers or superiors. Professional repercussions. Retaliation. These are some of the very real consequences that can occur as a result of doing the right thing by bringing fraud to light.

Yet research categorically shows that businesses depend on whistleblowers now more than ever to detect fraud. It should be incumbent upon corporate leaders to foster an environment in which employees are knowledgeable enough to know what constitutes fraud, and confident enough to report it when they see it. Most importantly, they should have the understanding that management will support their action – rather than punish them for it.

Michael Woodford bore the brunt of an organisational culture that did none of the above. When the business-savvy Englishman became the first Westerner to be named CEO of a major Japanese corporation – Olympus – he never suspected that he would see his 30-year career there end with him being shunned and marginalised… all for telling the truth.

Olympus was committing massive accounting fraud – and when the falsifications and fictionalised earnings were brought to his attention, a shocked Woodford insisted that the organisation come clean. Directors at Olympus had other ideas. Woodford was abruptly fired for, as they termed it, “a management culture clash”. When some signals from his old company became downright threatening, according to Woodford, he eventually returned to England – in fear of his life.

He was soon vindicated when company officials admitted to a decade-long cover-up valuing more than £1bn. Yet it came at the cost of the career he had built over three decades at Olympus. Today, Woodford speaks to packed conference halls about his harrowing experience, imparting the importance of acting with integrity in the face of adversity.

Thankfully, not every employee who blows the whistle on fraud ends up fired, threatened, or worse. We know this because of what fraud experts tell us: most cases of fraud are initially discovered through a tip. In the Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse, we found that 43 percent of the cases of occupational fraud in our study were detected by a tip, far ahead of management review (15 percent) and internal audit (14 percent). Moreover, the majority of tips reporting fraud come from employees of the victim organisation. This data comes from nearly 1400 Certified Fraud Examiners (CFEs) worldwide who provided detailed information on one fraud case they investigated during the previous year.

While unfortunate to be victimised, most of the companies in these cases are doing something right based upon the fact that the frauds were, ultimately, investigated – as it stands to reason that many of these frauds would not have made it ‘on the books’ if not for management teams that were receptive to tips. It is not enough, however, for corporate leaders to simply be content to act on information when it arrives. In order to protect their organisation from fraud, it is imperative that they actively foster an environment in which such reporting is expected and employees have confidence that tips will be investigated. This represents one important aspect of a corporate culture referred to as Tone at the Top.

Directors and managers must create and maintain a workplace environment that supports a strong Tone at the Top – one that rewards ethics, accountability, and integrity, while also reinforcing a strong anti-fraud stance. There are several methods of action through which this can be accomplished.

The first step a company should take is to establish a thorough code of conduct for employees. Rather than solely burying it in an employee handbook, the code should be communicated clearly to all employees, with an added message outlining the organisation’s commitment to fraud prevention. This can be communicated through an open letter to employees but should also be reinforced through middle- and lower-management’s conversations with staff members.

The next step is to implement a system through which tips are received. Given the critical correlation between employee tips and the discovery of fraud, having an anonymous reporting system is an absolutely essential component of any anti-fraud program. There are a number of hotline providers who offer different levels of service in this area – the most effective systems provide different channels through which employees can make their reports (easily and discreetly). Case studies have shown that organisations who utilised integrated, multi-channel reporting systems (email, websites, telephone and ‘snail mail’) have successfully broadened their net and discovered frauds that had gone years undetected.

These reporting channels should be highly visible and communicated regularly to employees. The communication should stress the anonymity provided through the reporting system, as this will encourage more tipsters to come forward. Such high-profile exposure will also have a deterrent effect on would-be fraudsters. An employee might find themselves less inclined to commit fraud when they realise that their colleague, just one desk away, is fully versed on the means to report suspicious activity.

This, however, brings up another important point: employees also need training in order to know what constitutes fraud. As part of a fraud risk management program, the organisation should put an educational program in place that is required of everyone at all levels of the company. There is no one-size-fits-all method for instituting such a program; it should be tailored to the fraud risks specific to the organisation. Yet the training should reinforce the expectation that fraud will be reported immediately, and should instruct individuals on how to make such reports when needed. A successful training program is one that fosters a team approach toward preventing fraud.

Finally, the program is not complete without a formalised plan for how the company will act on tips after they are received. Responsibilities should be defined – whether investigations will be conducted by internal or external experts, how the progress of investigations will be monitored, and mechanisms to report the results to proper governing authorities as necessary.

Having an informed process in place will help establish confidence among employees that tips will be properly investigated, not overlooked or – worse – selectively disregarded or ignored.

Having such risk oversight measures in place will not only help detect fraud – they can also be critically important for liability reasons, especially among public corporations. In the US, the Securities and Exchange Commission (SEC) has made clear its intentions to hold directors accountable for lack of appropriate fraud risk oversight, a position exemplified through several high-profile cases. In the UK, David Green, Director of the Serious Fraud Office (SFO), has signalled an intention to step up investigation efforts against white-collar crime. In what can be perceived as a changing environment, ignorance that fraud is occurring is not an excuse that will necessarily grant immunity from the law.

Given these facts, there is no reason or justification for the next whistleblower to end up shunned, fired, and on the run like Michael Woodford. Most business leaders are attuned to the fact that fraud negatively impacts their bottom line – period. Understanding that their own employees – potential whistleblowers, every one – are their front-line defence for uncovering fraud should be motivation enough to provide encouragement, confidence and anonymity. The end result will be more fraud uncovered, and more schemes stopped cold.

James D. Ratley, CFE, is president and CEO of the Association of Certified Fraud Examiners. He can be contacted on +1 (800) 245 3321 or by email: jratley@ACFE.com

James D. Ratley

Association of Certified Fraud Examiners