Workplace Issues

Employees More Loose-Lipped About Fraud

A recent study suggests employees are more willing to blab about fraud-related incidents to internal hotlines, even though new whistle-blower rules...
Sarah JohnsonNovember 23, 2011

Employees continue to report incidents of corporate fraud through internal means in high numbers, despite new rules that skeptics had predicted would deter employees from keeping tips in-house before involving regulators.

Just over 21% of incidents reported in internal hotlines and other reporting mechanisms in the third quarter were fraud-related, according to The Network Inc. and BDO Consulting. Rising 2.2 percentage points from the same time last year, the figure reflects an all-time high for fraud-related incident reports since the two firms began conducting their Quarterly Corporate Fraud Index in 2005. The index compares fraud reports with other types of compliance complaints, such as personnel and health and safety concerns, by looking at tips made to hotlines at more than 1,000 organizations, including public and private companies.

What the latest report doesn’t tell us is “whether actual fraud is occurring,” says Luis Ramos, CEO of The Network, a governance, risk, and compliance consultancy. That’s because whistle-blowers may be passing on suspicions or even falsehoods. However, the data does suggest that employees are more willing to come forward with reports nearly 10 years after Enron’s fraud-laden bankruptcy and the regulations that followed, including mandated hotlines for publicly traded companies. Employees appear less likely to look the other way when they see wrongdoing, Ramos contends. “Part of the trend is driven by the higher willingness of employees to act as the eyes and ears of the organization to detect fraud in the workplace,” he says.

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The Securities and Exchange Commission’s new whistle-blower program, mandated by the Dodd-Frank Act, went into effect in the middle of the last quarter. Informants can collect 10% to 30% of penalties from SEC enforcement actions that total at least $1 million. Critics of the program have said the rules surrounding how informants of securities fraud can cash in encourage employees to bypass their own compliance departments, putting companies at a disadvantage in SEC cases.

So far, the SEC has received 334 whistle-blower tips under this new regime. The most common complaints concerned market manipulation, corporate disclosures and financial statements, and offering fraud, according to an SEC report on the program’s activity between mid-August and the end of September, when the commission’s 2011 fiscal year ended.

Since the rules went into effect, Ramos says, companies have been promoting the existence of their hotlines through their corporate intranets, notes on payment stubs, and other communications with employees. Organizations are also making a more concerted effort to keep whistle-blowers in the loop on internal investigations, to make it clear their allegations are being taken seriously, he adds.