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Business Ethics

5 Big Advantages of Using Ethics Hotlines to Detect Fraud


Mar 10, 2016

ethics hotlineAccording to a presentation from accounting firm Kaufman Rossin Group, the number one way that non-profit organizations, private businesses, public companies and governments detect fraud is through tips.

And perhaps one of the best ways for any of these organizations to collect tips about fraud is through ethics hotlines.

So why should your company invest in an ethics hotline? We’ve got five reasons for you.

1. Maintains Compliance with Sarbanes-Oxley Act of 2002

The Harvard Law School (HLS) Forum on Corporate Governance and Financial Regulation argues that an ethics hotline helps to meet the requirements of the Sarbanes-Oxley Act of 2002 (SOX). Specifically, SOX requires publicly traded companies in the U.S. to establish a reporting function allowing for the confidential, anonymous reporting by employees of concerns regarding questionable accounting or auditing matters—which is basically an ethics hotline.

Additionally, the HLS Forum states, “Research reveals that internal employee hotlines facilitate the detection of unethical or unlawful conduct, as tips are the most common detection method for suspected wrongdoing in companies with or without hotlines. In companies with an internal hotline, tips account for over half of all fraud detection versus only one-third of detections in companies with no internal hotline.”

2. Discourages Employees from Going to the SEC

As the Society for Human Resource Management (SHRM) explains, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted to help reform the nation’s financial system, includes incentives and protections for whistleblowers.

The law allows whistleblowers to report fraud directly to the Securities and Exchange Commission (SEC) and profit from their information. They no longer need to use the company’s internal reporting system.

However, the SHRM article states, “Even though the statute doesn’t require whistleblowers to use internal reporting, the SEC suggests that if employers take their compliance responsibilities seriously, organizations will have an internal compliance program and will ensure employees have the proper knowledge and confidence to use internal processes before going directly to the SEC.”

3. Faster Investigation and Resolution

Fulcrum Inquiry, a financial and economics consulting firm, explains why fast investigations and resolutions from ethics hotlines are good for businesses. Fulcrum points out that a survey conducted by the the Association of Certified Fraud Examiners found that when fraud is reported through a tip, the dollar amount was 50 percent less than when it was reported through other means.

Additionally, Fulcrum makes the case that coworkers are typically the first ones to realize that something is wrong. In fact, they know well before upper management finds out. So if they can report their suspicions, the fraud can be investigated before it has a chance to escalate.

4. Complete Confidentiality and Privacy

One of the main reasons employees prefer ethics hotlines is the anonymity they provide. While at work, an employee might be afraid that IT will see them typing an email or a coworker will overhear they’re conversation. But if they can call the hotline from the privacy of their home or a location outside the office, employees will be much more likely to report suspected wrongdoing.

Additionally, if the report is confidential, an employee will be more likely to come forward without the fear of retaliation. A third-party company won’t know who the person is and what role they fill in the company—allowing them to lend an impartial ear.

5. Component of a Good Compliance Program

Jim Brennan, writing for the Compliance and Ethics Blog, makes the case for ethics hotlines. He states that government andquasi-governmental bodies offer compelling incentives and disincentives for either having or not having a hotline.

He also writes, “Under the United States Sentencing Guidelines, for instance, convicted companies which are found to have had an effective compliance program may have their fines reduced up to 90%. If, on the other hand, a company is found to have ignored this vital component of corporate compliance, it can get thumped by the court even harder.”

Conclusion

As you can see, ethics hotlines are an essential tool for detecting fraud. But don’t forget about the other elements that make for an excellent compliance program such as a formal code of conduct and business ethics training. Each of these elements will complement your ethics hotline and help to protect your company from fraud and corruption.

To learn more about our ethics training courses, schedule a demo today.

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