Blowing the whistle: a well-designed, accessible whistleblower hotline can be a powerful tool in the fight against fraud.

FOR MOST BUSINESSES, fraud represents a significant threat to the organizational coffers. Nearly half of all companies worldwide have been victims of economic crime in the past two years, costing them an average of US $1.7 million, according to Pricewaterhouse-Coopers' Global Economic Crime Survey 2005. In fact, the Association of Certified Fraud Examiners (ACFE) estimates that U.S. businesses lose 6 percent of their revenue--more than US $600 billion--to fraud annually. Since the U.S. Sarbanes-Oxley Act of 2002, Canadian MI 52-110, and UK Combined Code on Corporate Governance were introduced, most public corporations and many private organizations have implemented a whistleblower hotline to help curtail this loss. For internal auditors, this may be the most beneficial aspect of the entire governance reform movement, because an effective hotline is a powerful tool for fighting fraud.

Hotlines repeatedly have proven their ability to detect and deter illegal behavior. According to the ACFE's 2004 Report to the Nation on Occupational Fraud and Abuse, fraud losses are reduced by nearly 60 percent when a hotline is present. In fact, fraud is discovered via tips 40 percent of the time, making tips the No. 1 method of fraud detection. Internal audit procedures, on the other hand, were the second most common method of fraud detection, accounting for 24 percent of discoveries.

Warren E. Buffett, chairman of the board of Berkshire Hathaway, a global investment firm with 180,000 employees, praised the company's recently installed hotline in his 2005 chairman's letter. "Berkshire would be more valuable today if I had put in a whistleblower line decades ago," he wrote. "The issues raised are usually not of a type discoverable by audit, but relate instead to personnel and business practices."

Indeed, internal auditors have an excellent tool at their disposal; the challenge is to develop hotline communications and procedures specifically designed with fraud prevention as a primary deliverable. To improve the impact of the hotline, internal auditors should explore a variety of anonymous whistleblower reporting mechanisms, consider hotline best practices, understand how an ethics program can boost the hotline's effectiveness, and ensure the establishment of appropriate report dissemination procedures.

ANONYMOUS REPORTING

One in five American workers possess personal knowledge of workplace fraud, according to a 2002 study sponsored by Ernst & Young LLP, and 39 percent are more likely to report fraud if they could remain anonymous. One possible explanation for the desire to remain anonymous is the fear of retaliation that inspired the whistleblower protections outlined in Sarbanes-Oxley.

The Ernst & Young survey highlights employees' preference for telephone hotlines as a whistleblowing tool. In fact, 57 percent of respondents stated they would use a telephone hotline to report unethical behavior, while only 20 percent would write an anonymous letter, and just 16 percent would use an anonymous Web site. The perceived ease of tracking Internet protocol addresses could be a cause for concern, or it could be that going online is simply less convenient than picking up the phone. Regardless of the reasoning, internal auditors will find the...