(Third in a five-part series)

By Gary Markey, CPA, CFE, CIA
Stambaugh Ness Accounting and Auditing Manager

In the previous two articles* in this series, we discussed the increased risk of fraud and the importance of fraud prevention during an economic downturn and the role that corporate culture plays in preventing fraud. This topic comes from the ...

AICPA Audit Committee Effectiveness Center:

"A key defense against management override of internal controls is a process for anonymous submission of suspected wrongdoing (whistleblowing) that typically incorporates a telephone hotline." (AICPA Guidance on Whistleblower Programs)  Various studies conclude that tips are the most common method for detecting fraud.  In 2006, the Association of Certified Fraud Examiners (ACFE) reported that tips accounted for 34% of fraud cases detected. For this reason, public and private companies alike are realizing the benefits of effective Whistleblower hotlines.

Recognizing the importance of an effective reporting system, the AICPA Antifraud Programs and Controls Task Force recently provided guidance on issues to consider when evaluating the effectiveness of a Whistleblower program. We have chosen to highlight certain aspects that might be most applicable to our clients. You can find the full text here.

• Does the hotline demonstrate confidentiality, including showing how caller ID, e-mail tracking, and other technologies cannot be used to identify the whistleblower?
• Has the entity considered use of an independent hotline operator to enhance the perception of confidentiality in addition to any real improvement?
• Are callers provided with a unique identification number to enable them to call back later anonymously to receive feedback or follow-up questions from investigators?
• Does the entity effectively distribute comprehensive educational materials and training programs to raise awareness of the hotline among potential users?
•  (The ACFE reports that approximately 1/3 of tips come from sources outside the company)
• Does the entity effectively distribute comprehensive educational materials and training programs to raise awareness of the hotline among potential users?
• The ACFE has also reported that companies that have experienced fraud loss and had anonymous reporting hotlines in place incur significantly lower median losses and detect the cases in a much shorter time period. Based on these statistics, hotlines are arguably the most cost effective anti-fraud measure.

Our next article will discuss how fuel cards can be used to commit fraud.

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