Indifference to Ethical Business Conduct is Death for Organizations

FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President

In my decades of anti-fraud work I've learned more things than I've taught. Here's one important nugget: Organizations should encourage whistleblowers. (At the ACFE, we like to call them sentinels.) As in years past, the 2016 Report to the Nations says the most common detection method still is tips.

In Fraud Magazine's latest cover article, Top 10 factors leading to hotline distrust: Understanding why no one calls, authors Ryan Hubbs and Julia Kniesche write that whistleblowers have always been subject to false allegations, retribution from management and even dismissal.

I've met few whistleblowers who weren't targets of their organizations after they bravely stepped up to the plate. (Just read the stories of Tony Menendez and James Holzrichter.)

Hubbs and Kniesche write that employees often ignore company hotlines because they witness top management's indifference to ethical business conduct. "When employees see management retaliating against would-be whistleblowers, the message at the operational level is clear: Mind your own business, don't ask questions and keep your head down if you want to keep your job," they write.

That attitude is death for organizations. "An ethics hotline reporting system becomes meaningless when employees can't trust that local management will take appropriate action," say the authors.

Some of the factors that lead to ineffective hotlines, they share, include neglecting to train hotline workers well; management that interferes; employees who don't understand the systems; inadequate resources and poor program designs; and retaliation against whistleblowers.

Sometimes, organizations begrudgingly begin hotlines because of stipulations in the U.S. Sarbanes-Oxley Act and the Dodd-Frank Act, or European Union directives.

However, the organizations that see the best hotline results initiate them because they know they'll encourage strong internal cultures and revive flagging morale. As the authors write, employees' lack of trust in the reporting process can create unhealthy work environments, and eventually result in employment lawsuits, legal and regulatory actions, loss of assets, external whistleblower complaints, poor customer perception or brand reputation, and high employee-turnover costs.

Hubbs and Kniesche write that most employees want to do the right thing, and organizations need to do what they can to help support and encourage employees to report. "Failures in employee reporting today can result in significant operational and reputational hurdles tomorrow," they explain. They encourage you to follow their tips to strengthen your reporting program so no top executive ever has to ask the question, "What went wrong?"

Employers Beware: Confusion on Whistleblower Protection Breeds Silence

GUEST BLOGGER

Sheila Keefe, CFE
Principal, BDR Advisors, LLC
Lake Geneva, WI

Anonymous tips serve as the No.1 fraud detection tool available, according to the ACFE’s 2010 Report to the Nations on Occupational Fraud and Abuse, which states that tips are the leading source of initial detection of occupational fraud with a discovery rate of 40 percent. As helpful as tips are in the fight against fraud, those brave enough to come forward may be putting their jobs at risk. However, the key to protection can be as easy as understanding the legal provisions.

Several whistleblower protection laws and rules are in place to prevent retaliation against whistleblowers, including the Whistleblower Protection Act of 1989, Sarbanes-Oxley Act (SOX) and the Dodd-Frank Reform Act. But even with these protections, retaliation still occurs. In Tides v. The Boeing Co., the Ninth Circuit Court excluded two auditors from SOX whistleblower protection because the whistleblowers went to the media instead of approved recipients such as supervisors, law enforcement and Congress. These two Boeing auditors were not the first to make the mistake of going first to the media. An Air Marshall did the same thing in 2009 when he expressed concern that Air Marshalls would not be flying on long, non-stop flights in order to accommodate budget constraints.

Aside from the importance of using the right channels for anonymous tips, courts have also expressed concern over informants coming forward with wild accusations. In 2006, a whistleblower went to authorities with office gossip about possible fraudulent misstatements by Northwestern University made in efforts to secure a more favorable bond rating and loans. When the claims proved baseless, the courts denied the informant whistleblower status citing inadequate evidence.

These cases show that prospective whistleblowers should be mindful of the elements that allow for protection. Unfortunately, such confusion on what it takes to qualify for whistleblower protection may silence many, possibly explaining why most tips come in anonymously or from company outsiders, with just 49 percent of tips coming from employees, per the Report to the Nations. Employers who wish to mobilize their workforce to fight fraud should do their best to ensure that whistleblowers feel comfortable coming forward in spite of what they may fear by putting in place vigorous whistleblower protection programs in their organizations that can include whistleblower hotlines and anonymous update mechanisms.

To read more about Sheila or to follow her blog, Business Done Right, go here.

New, Changing Laws Call for Open Minds and Informed Objectivity from CFEs

LETTER FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President and CEO

We’ve all heard the adage that a crisis can be an opportunity. But how often, when we’re focused on solving an immediate problem, do we miss the chance to leap forward to more comprehensive remedies? As CFEs, we owe it to our clients and employers — and to our own career aspirations — to identify and/or devise strategies that meet current and future needs.

With that in mind, consider the Security and Exchange Commission’s (SEC) proposed revamping of its whistle-blower program as mandated by the Dodd-Frank Act (see recent Forbes post). The plan permits those reporting corporate malfeasance to bypass internal whistle-blowing channels and go straight to the SEC without jeopardizing their eligibility for an up-to-30-percent share in any resulting sanction of $1 million or more against corporations.

Critics say this strategy will seriously weaken corporations’ fraud detection and prevention regimes that the Sarbanes-Oxley Act mandated. Plus, if a whistle-blower tells only the SEC about a fraud, the corporation — presuming it is unaware of the fraud — would issue financial statements that inadvertently conceal the fraud.

Therefore, employers might consider revising and strengthening their internal reporting procedures to encourage employees to first raise any concerns directly with them before bringing legal claims in court or to regulatory bodies.

This complex issue calls for equally pressing considerations, such as the need for a prompt, effective response when frauds are revealed and incorporation of whistle-blower protection. In numerous recent cases, employees who reported significant fraud through corporate channels were, at best ignored or, at worst, persecuted. In some cases, the common good also suffered when the unresolved fraud continued.

These valid and sometimes opposing concerns call for open minds and informed objectivity. As CFEs, we are uniquely qualified to provide leadership to our employers and clients and help them implement anti-fraud measures that address both individual incidents and overall circumstances.

Read the full Letter from the President from the latest issue of Fraud Magazine here.