Whistleblowing – how effective is it really in fighting occupational fraud

Occupational fraud is likely the largest and most prevalent threat to businesses without many of them realizing it.  Occupational fraud is fraud committed from within against the business by its own officers, directors, or employees.  Businesses are so focused on operations and profit that they neglect to address and implement policies and procedures to identify and address occupational fraud. 

The extent of this problem is clearly emphasized but the recent State of the Nations report released by the ACFE where the following statistics were confirmed:

  • More than $7 billion in losses annually
  • More than $1 million of losses in 22% of identified schemes
  • Average duration of fraud scheme is 16 months before detected
  • Corruption is the most common scheme is every region
  • Small businesses lost almost twice as much as bigger ones
  • Tipoffs/whistleblowing is the biggest reason for detection – 40%

    From this report it is clear that an effecting whistleblowing programme is the most effective way to detect occupational fraud.

    Second most effective strategy is through internal audit processes -according to the report 15% of occupational fraud are identified. This is 25% less successful than a whistleblowing solution.

    According to the report, “Whistleblowing is central to … constitutional principles. It is key in the fight against corruption and mismanagement, especially of public funds, and to strengthening transparency and accountability within organisations and society more generally”.

    A business should have a whistleblowing program because:

    • It is central to Constitutional Principals;
    • It is key in the fight against corruption and mismanagement;
    • It is an integral part of company regulatory compliance or ethics program;
    • 40% of all internal fraud tips comes through a hotline or reporting channel;
    • Companies loose at least 5% of annual turnover due to fraud, corruption and dishonesty;
    • It encourages a transparent culture;
    • It is an effective tool to mitigate risks prior; during and after risk;
    • It increases employee satisfaction due to emphasis on safety and integrity;
    • It increase productivity with more time spent on constructive efforts, and
    • It protects the organization (fines, negative publicity, law suites etc.) and its employees (Showing a culture of investing and caring for them).

    The following are elements of an effective Whistleblowing solution:

    • Hotline as an integral part of company’s corporate compliance and ethics program. 
    • Anonymity and confidentiality. 
    • No retaliation. 
    • Positive “tone from the top” approach.
    • Educate, publicize and make hotline available to all role-players
    • Multiple uses for hotline, including a helpline. 
    • Record and analyze statistics. 
    • Hotline managed by third-party provider. 
    • Evaluate, test and audit.

    When assessing an organization’s fraud risks and designing anti-fraud controls, it is important to remember that fraudsters typically act when an opportunity arises.  One of the most growing phenomena’s that XTND is currently investigating is ghost employees.  Millions are stolen yearly by employees creating and paying ghost employees.  This problem is easy to identify and address by applying a few basic checks and searches.  As mentioned above the biggest detection of white-collar crime is done by means of whistle blowing or tipoffs.

    Current Whistleblowing legislation in South Africa, The Protected Disclosures Act, Act 26 of 2000 only requires listed companies to have some sort of Whistleblowing solution with no real guidelines. Due to “toothless” nature of this act most listed companies creates an internal solution that is not really conducive to the spirit of whistleblowing. Adhering to this requirement is more seen as ticking a tick box than creating it for a solution.

    Occupational fraud is a reality in South Africa and research has found that losses vary from an average of 5% in corporates to almost 20% in SME’s due to this. All businesses need to realize and understand the value of a reputable whistleblowing solution. The utilizing of a good whistleblowing solution should not be enforced by any Act, it should be every business’ responsibility to do their part in eradicating occupational fraud and corruption.

    Using the latest technology XTND has created a simple and inexpensive whistleblowing App, ExposeIT, which can be tailored for any business. This solution uses technology and not the traditional call centers as the traditional ones do.

    Basic Steps to Decrease your Fraud Vulnerability

    1. Be Proactive.
      Adopt a code of ethics for management and employees. Evaluate your internal controls for effectiveness and identity areas of the business that are valuable to fraud.
    2. Establish Hiring Procedures.
      When hiring staff, conduct thorough background investigations. Check educational, credit and employment history (as permitted by law), as well as references.
    3. Train Employees in Fraud Prevention.
      Do workers know the warning signs of fraud? Ensure that staff members know basic fraud prevention techniques.
    4. Implement a Fraud Hotline.
      Fraud is still most likely to be detected by a tip. Providing an anonymous reporting system for your employees, contractors and clients will help uncover more fraud.
    5. Increase the Perception of Detection.
      Communicate regularly to staff about anti-fraud policies, ways to report suspicions of misconduct, and the potential consequences (including termination and prosecution) of fraudulent behavior.