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The risk of fraudulent activity within a company is nothing new. According to the Journal of Accountancy, losses from fraud can total approximately 5 percent of annual revenues for a typical company. Over the years, Sarbanes-Oxley (SOX) and the Dodd-Frank Act have encouraged employers to address fraud through the development of a company-wide whistleblowing program. The Association of Certified Fraud Examiners recently reported that most cases of internal fraud were discovered in 2014 through employee tips, ranging from 34 to 45 percent of instances, based on the size of the company. Organizations that create and implement a whistleblowing program can learn more about the fraud before an employee takes the news to the general public. There are several ways in which companies can encourage their employees to "blow the whistle" on suspected fraud:


Reward good behavior. The SEC has announced that it expects to pay an award of more than $30 million to a whistleblower. This is the highest payout in the history of the commission's two-year-old whistleblower program. Smaller companies could offer recognition, a promotion, or equity as a reward for good behavior.


Make it easy to report. Management should communicate the existence of a whistleblowing hotline to its employees, whether the hotline is internal or third party administered. Having a fraud hotline allows for employees to submit tips anonymously, however, some employees may still be deterred from reporting issues for fear of privacy breaches. This is why it's important for management to encourage the use of hotlines and assure employees the information will only be used internally.  


Communicate regularly. Just as companies implement emergency action procedures in case of a fire, an organization should communicate a plan of action for internal fraud discovery. Management or other accountable individuals should regularly inquire employees as to whether they have any knowledge of potential fraud.

Lead by example. Management should not disregard employees who report seemingly minor activities. These could be warning signs of more serious fraud. Leadership should recognize employees as a resource for fraud discovery without brushing them aside. Additionally, while the anonymous nature of a hotline allows employees to feel comfortable, it may also lead management to dismiss some reports if they do not appear to be serious. A formal review structure of anonymous tips would help to ensure that all tips are given appropriate levels of consideration and are not ignored.

For more information or questions on this topic, please contact your local UHY LLP professional.