Canada: The Benefits And Banes Of Fraud Hotlines

Last Updated: April 26 2011

Article by Ari Kashton, CA•IFA/CBV, CFE, DIFA

Are fraud hotlines worth it?

The Association of Certified Fraud Examiners' (ACFE) is an enthusiastic supporter of fraud hotlines. Their research indicates that frauds are most frequently detected by investigating tips and fraud hotlines are, effectively, institutionalized tip-collecting mechanisms.

THE LOGIC OF FRAUD HOTLINES - TIPS ARE THE MOST COMMON FRAUD DETECTION METHOD

The ACFE has collected a plethora of data to support its belief in the benefits of fraud hotlines. The ACFE's 2010 Global Fraud Study, the Report to the Nations on Occupational Fraud and Abuse finds that, "Tips were by far the most common [fraud] detection method ..., catching nearly three times as many occupational frauds as any other form of detection." This finding is consistent with every ACFE Global Fraud Study since 2002 - when the ACFE began collecting fraud hotline data.

Based on the results of the ACFE's 2010 Global Fraud Study, tips led to the discovery of about 40% of detected frauds. Comparatively, management reviews and internal audits detected 15% and 14% respectively. Interestingly, 8% of frauds were discovered by accident, while external audits only discovered 5% of the frauds. (Don't bank on external auditors to find fraud!) Other internal processes which discovered frauds included account reconciliations (6%), document examination (5%) and monitoring (3%). In addition, rarer methods for discovering fraud were police notification (2%), perpetrator confession (1%) and information technology controls (1%).

Given that tips were the catalyst for 40% of the detected frauds, one can understand the ACFE's enthusiastic support of fraud hotlines.

THE FINANCIAL CASE FOR FRAUD HOTLINES

The ACFE survey's participants estimated that the typical institution (corporate, not-for-profit or government agency) loses the equivalent of approximately 5% of revenue to fraud. For example, a company with $10 million in annual sales is estimated to lose $500,000 a year to fraud. Similarly, a city with $10 billion in annual revenue (like Toronto) is estimated to lose $500 million a year to fraud. Whether or not the 5% estimate is universally applicable is debatable; however, it is evident that financial losses due to fraud are believed to be quite significant.

Given the significance of the potential financial losses from fraud as well as the effectiveness of tips in discovering fraud, the ACFE's studies suggest that a fraud hotline should be a financial priority for most commercial, not-for profit and government agencies.

RISKS OF NOT HAVING A FRAUD HOTLINE - THE ENRON EXPERIENCE

Consider the Enron collapse of December 2001. Enron did not have a fraud hotline. Enron's stock collapsed as internal financial fraud became evident. Shareholders lost approximately $11 billion. Some propose that the financial problems at Enron commenced as early as 1986 when Enron suffered a long succession of business failures. Others note the change from business failures to outright fraud may have commenced around 1996 when Enron's Chief Financial Officer, Andrew Fastow, (with the tacit approval of Enron's auditors) began hiding Enron's growing debts in off-book entities. During this period some Enron employees had either direct knowledge or deep suspicions about Enron's financial problems, but Enron had no formal reporting process. No one officially came forward until August 2001, when Sherron Watkins, a Vice-President for Corporate Development, (at great personal risk to herself) sent an anonymous letter to Enron's Chief Executive Officer, Ken Lay, outlining some of Enron's questionable accounting practices. However, by then the financial damage had been done. Enron went bankrupt within three months.

FRAUD HOTLINES COME OF AGE

Companies, not-for-profits and government agencies, with foresight and/or experience, are recognizing the benefits of implementing fraud hotlines. For example, in 2001 the City of Toronto discovered that it had paid a company $85 million to lease computers. Unfortunately, City Council had only approved an expense of $43 million. Subsequent to this $42 million fraud, in 2002, the City of Toronto became the first municipality in Canada to implement a fraud hotline.

FRAUD HOTLINE BASICS

Aside from phones, hotlines can also collect information via internet forms, e-mail and/or regular mail. In addition to fraud, some hotlines capture additional information covering areas such as harassment, employee complaints, discrimination, violence, etc.

In all cases hotlines involve establishing a formalized information collection, reporting and issue disposition system. Underpinning the system are operational, communication and investigation protocols. Other fundamental components include the creation of a governing fraud policy, standardization of information collection/reporting forms and the establishment of secure, high level, and independent reporting lines. Effective hotlines create a cradle to grave record for the disposition of each issue.

THE ADVANTAGES OF FRAUD HOTLINES

Some of the more notable advantages of a fraud hotline include:

  1. Increased detection of internal and external fraud;
  2. Increased recovery of fraudulent losses;
  3. Increased detection of internal control weaknesses;
  4. Increased prevention of fraud (through the increased perception of detection);
  5. Centralized fraud reporting and investigation co-ordination;
  6. Increased communication and operational improvements;
  7. Increased employee moral;
  8. Positive effects related to internal and external public relations;
  9. Positive recognition of ethical and effective governance;
  10. Proactive compliance with institution charters, fraud policies and governing laws.

THE DARK SIDE OF FRAUD HOTLINES – THE MADOFF EXPERIENCE

Notwithstanding the benefits of fraud hotlines, there are potential risks to consider. For example, the Securities and Exchange Commission (SEC) – one of the world's most feared regulators - has a long experience handling fraud tips. Notwithstanding the SEC's experience and reputation, from the spring of 2000 to Bernie Madoff's financial implosion in December 2008, Harry Markopolos contacted the SEC no less than five times with increasingly poignant financial evidence that Madoff's investment activities were a fraud. Despite eight examinations, the SEC failed to find Madoff's fraud. Pundits estimate Madoff investors lost $65 billion.

FRAUD HOTLINES - DISADVANTAGES/CONCERNS

Potential disadvantages and/or concerns related to fraud hotlines include the following:

  1. Potential costs associated with fielding all calls:
    1. Call volume;
    2. Seriousness of issue (nuisance, venting calls);
    3. Legitimacy of issue (vexatious, slanderous calls);
    4. Materiality of issue (petty calls);
  1. Potential errors in process and/or judgments relating to:
    1. Assessing the issues;
    2. Collecting additional information;
    3. Communication of the issues;
    4. Investigation of the claims;
    5. Investigation management and reporting;
  1. Potential costs associated with investigating all calls;
  2. Investigations/follow-up difficulties regarding anonymous callers;
  3. Corporate culture / work environment issues (potential Big Brother stigma);
  4. Potential lawsuits related to investigations;
  5. Potential repercussions of failed investigations;
  6. Data security issues;
  7. Privacy issues;
  8. Whistleblower protection concerns (if the tipster is not anonymous).

FRAUD HOTLINES - CONCLUDING THOUGHTS

The ACFE estimates that companies and government entities with fraud hotlines cut their fraud losses by approximately 50%. However, the ACFE also notes that many individual fraud examiners question the effectiveness of some fraud hotlines. These examiners note that many "fraud calls" may not be fraud related and or may lack sufficient information to investigate the issues.

Ultimately, the effectiveness of a fraud hotline depends upon the people involved. It starts with proactive and enthusiastic support from top-management, appropriate funding, experienced staffing (at all levels of the hotline: information collection, assessment, investigation, management and reporting), continuous internal fraud education and continuous fraud line awareness marketing.

In conclusion, fraud hotlines must be intelligently implemented, actively monitored and diligently maintained to realize the expected benefits.

ABOUT THE AUTHOR

Ari Kashton, CA•IFA/CBV, CFE, DIFA

Ari Kashton is a Senior Manager in Soberman LLP's Business Valuation and Litigation Support Group. Ari enjoys assisting his clients by preparing and presenting financial analyses, quantifications and reports, both forensic and transactional, amongst a host of other responsibilities.

Ari has expertise in business and securities valuation, intellectual property and intangible asset valuation, investigative and forensic accounting; financial litigation accounting, acquisition due diligence, damage quantification, financial model and transfer pricing.

Ari also enjoys writing articles, academic papers and presentations, many of which are now published works. Ari speaks regularly in his areas of expertise and has presented to government officials, industry and professionals associations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Gowling WLG
Collins Barrow National Incorporated
Crowe Soberman LLP
Crowe Soberman LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Gowling WLG
Collins Barrow National Incorporated
Crowe Soberman LLP
Crowe Soberman LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions