Workplace Issues

Fraud Reports Climb

Employee reports of fraud are steadily increasing.
Caroline McDonaldNovember 15, 2012

Reports of fraud by corporate employees have steadily risen this year, according to the Quarterly Corporate Fraud Index, a joint creation of The Network and BDO Consulting. The current drivers are mandated whistle-blower protections, increasing awareness of fraud, and changing company cultures.

The index, which looks at compliance-reporting activity at more than 1,400 companies worldwide, measures reported frauds as a percentage of all compliance-related reports. Most recently, for the second quarter of 2012, that ratio climbed to 22.9%, up from 21.7% for the same quarter in 2011. The index has risen regularly since it began in 2005.

Corporate employees are becoming more aware of organizational issues and more willing to report compliance errors, especially fraud, says Jimmy Lin, vice president of product strategy and corporate development at The Network, a provider of governance, risk, and compliance solutions. Fraud is also more often covered in the news media lately, and companies have become more sophisticated in educating employees on what fraud looks like, Lin says.

Employers are highly motivated to hear about alleged internal fraud before an employee makes an initial report to the Securities and Exchange Commission, says Lin: “Even if it doesn’t turn into anything significant, they want to catch wind of it first.” Companies know that “even a hint of potential fraud issues in their organization, whether true or not,” puts their reputation at risk, he says.

Jonny Frank, a partner at StoneTurn Group, a forensic-accounting firm, points out that the SEC has offered incentives to encourage employees to use company-compliance hotlines. Another reason for the upward trend may be that the government expects companies to make the hotlines accessible to third parties, including customers and suppliers, as well as to employees.

In addition, a growing number of companies annually require employees to certify as to their knowledge of wrongdoing. That trend “suggests a culture where employees see that the company is serious and not just giving lip service to fraud,” says Frank.