Who is Most Likely to Uncover Workplace Fraud?

There are lots of different ways that fraud is uncovered in the workplace. It may surprise many of you that it’s not the SEC you should fear- it’s your own employees.

Posted by Joe Gerard in Ethics & Compliance, Fraud on March 26th, 2010
If you want to know if there are any fraudulent acts occurring within your company- your employees are usually the ones to ask.
There are lots of different ways that fraud is uncovered in the workplace. It may surprise many of you that it’s not the SEC you should fear- it’s your own employees. Employee whistleblowing continues to rise and has uncovered major fraud cases such as Enron, Pfizer and WorldCom. In the Dallasnews.com article “Whistleblowers Find More Corporate Fraud Than Regulators” they have reported that in the healthcare field, 41% of fraud cases are uncovered thanks to employees making the decision to blow the whistle. Today, many companies are encouraging their employees to report cases of fraud that they discover in the workplace, the only problem is, when employees step up to the plate, many of them still end up losing their jobs and facing retaliation the leads to them quitting. Many whistleblowers have been asked if they would do it again- most of them have said no.

The Rise of the Whistleblower

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A recent study that was released in The Journal of Finance, “Who Blows the Whistle on Corporate Fraud?” has reported that Securities and Exchange Commissioners aren’t necessarily the ones that corrupt executives and employees should be afraid of. When it comes to reporting workplace fraud, the study reported that overall, 17% of the 216 cases they reviewed were uncovered thanks to employees within the company. SEC regulators only accounted for reporting 6.6% of the fraudulent cases reviewed. The report gives two very different reasons regarding incentives or reasoning behind a whistleblowers decision to bring fraudulent actions public: One reason is the fact that

“On occasion, employees can gain from whistleblowing. When employees can bring a qui tam suit that the company has defrauded the government, whistleblowers stand to win big time: on average our sample of successful qui tam whistleblowers collect $46.7 million.”

On the other end of the spectrum, the decision to blow the whistle has more to do with ethics rather than monetary gain.

“For many employee whistleblowers the more important benefit to avoiding the potential legal liability which arises from being involved in a fraud. These types of employee whistleblowers face significant costs. In 45% of the cases, the whistle-blower doesn’t identify themselves individually to avoid the penalties associated with bringing bad news to light. In 82% of cases with named employees, the individual alleges that they were fired, quit under duress, or had significantly altered responsibilities as a result of bringing the fraud to light. “

Implications for Your Business

If you want to know if there are any fraudulent acts occurring within your company- your employees are usually the ones to ask. Since employees are the ones who deal with certain tasks on a day-to-day basis, being on the front lines puts them in a better position to know what is happening in each area of the company.

The best whistleblower protection comes from company policies and practices once fraud has been uncovered and the whistle has been blown. These protections tend to be left in the hands of employers, as there are too many grey areas surrounding whistleblower protection laws based on the nature of the fraud detected, the industry in which the employee works and the state in which the fraud was detected. It’s also important to consider the backlash your company takes when they develop a reputation for mistreating whistleblowers and employees who try to correct company wrongdoings in order to protect the public and the investors. Business Intelligence at Work discusses the importance of internal investigations and their impact on a whistleblower case:

“Whether your firm is publicly- or privately-held, a well-run internal investigation designed to produce credible results can turn a potential corporate crisis into a valuable opportunity to enhance a company’s reputation. The credibility of the result of the investigation depends in large measure on the credibility of the process used, including 1) the process used in-house by HR, 2) that used by outside counsel and/or investigators, and 3) in-house HR’s coordination of both internal and external processes.”

As an employer or a member of your company’s human resource or audit committee, the way in which a whistleblower situation is handled greatly impacts the image of your company. Many businesses claim that they encourage their employees to come forward and report fraud that they detect in the workplace. Encouraging employees to help you in your fight against corporate fraud is good and all, however, many companies still don’t stand behind their employees when they actually come forward with an issue of fraud.

Solutions for Employers

Employers should consider establishing hotlines or other systems that allow for anonymous employee reporting, should they uncover fraud or other workplace violations. These systems make it easier for employees to build up the courage to bring these issues forward- without having to worry about losing their job or facing other forms of retaliation. Anonymous reporting systems make it easier for your investigations team to look into these claims and stop fraud and other violations from carrying on any longer. In many cases that have made it to public attention, it was noted that the fraud schemes had been taking place for a number of years without being reported. Early detection and reporting of fraud is what allows many businesses under investigation to salvage their reputation in the public eye. When the public is aware that there was internal knowledge of fraud and it had been going on for some time, the public backlash is likely to cripple your company. Make anonymous reporting  of fraud accessible and possible for your employees- in your company’s workplace ethics and compliance policy, address the issue of reporting fraud in the workplace. Outline the steps to anonymous reporting, include hotline or ombudsman contact information and ensure that confidentiality will be upheld to the highest degree possible. Look into investigation systems such as i-Sight Investigation Software- it sends alerts when a new complaint or issue is made and it can be used along with your hotline system. i-Sight makes it less expensive and more efficient for conducting internal investigations and allows you to react to cases based on their ranking of importance. i-Sight is a great solution for reacting to allegations in a timely manner and tracks repeat offenders.whi


Joe Gerard
Joe Gerard

CEO, i-Sight

Spend my days showing off the i-Sight investigative case management software and finding ways to help clients improve their investigations. Usually working with corporate security, HR & employee relations, compliance and legal teams.

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