The Network in the News

Fraud Reports Rose Again in Q2

December 27 2011

from BDOC Viewpoints

BDO Consulting and The Network, Inc. released the second quarter 2011 findings of the Quarterly Corporate Fraud Index™, a comprehensive examination of fraud incident report activity from almost 15 million employees worldwide. BDO Consulting Partner Glenn Pomerantz and Luis Ramos, CEO of The Network, Inc. recently spoke with Compliance Week about some of the trends behind the findings. The Q&A below is adapted from this interview.

According to the Quarterly Fraud Index, reports of corporate fraud rose to 20.8 percent of all compliance reporting activity in Q2 2011, its highest peak since the index was created in 2005. What do you think is driving this?

Pomerantz: The record level of fraud reporting is a link to the growing willingness by employees to report issues more readily. There is more awareness in regard to fraud in the market today and less tolerance. That’s the real driving force for the index going up, not necessarily that there is more fraud today than a year ago, or a quarter ago. The poor economy is also a factor, as is the time it takes to uncover fraud. We may in some part be dealing with frauds that were identified over the last quarter that started a year or two ago, when the economy in a lot of people’s opinions was at its worst.

Ramos: We believe it’s a combination of both factors – there is more fraud occurring as a result of tough economic times and people making desperate choices, but we think that a lot of the additional reporting that is going on is not tied necessarily to more fraud, but to this greater willingness to talk about it. However, this may actually be good news for companies. The quicker you identify it and the faster you’re able to deal with it, the less likely you are to have a greater cost associated with that.

How will the Securities and Exchange Commission’s new rewards program for whistleblower tips, which does not have an internal reporting requirement, change fraud reporting?

Pomerantz: I’d be pleasantly surprised if more people don’t start bypassing internal reporting mechanisms in favor of going straight to the SEC, because of the potential amount of the incentives, but I hope I’m wrong.

Ramos: We actually believe most whistleblowers are more interested in fixing an internal problem than they are in receiving any reporting award. The way to get employees to come forward with fraud reports is to make sure employees know that the whistleblower program exists and that managers are acting on the information that is provided to them and are further communicating that information, so employees know they’re being heard.

BDO Consulting and The Network also issued a study of compliance hotline-related activity from the past five years, which shows companies are doing a better job of acting on hotline tips. In 2010, companies conducted investigations in 68 percent of all incidents reported, and three out of five of those cases resulted in corrective action. But in slightly more than 10 percent of all hotline reports, no outcome could be determined with the information available. Can companies derive any value from these types of reports?

Pomerantz: Companies should still use the data from inconclusive whistleblower reports to improve their controls going forward. If you have a bevy of whistleblower reports in a particular area but don’t have enough evidence that fraud took place, it still makes sense to beef up detective controls in that area.

Ramos: Employees are also using more avenues to report fraud. In 2010, 8.3 percent of all incidents were reported online, up from 5.6 percent in 2008. In most of those cases, employees fear retribution. The telephone is still the primary way that issues are reported in large part because it truly is anonymous.

What Can Companies Do to Reduce the Effects of Fraud?

In order to mitigate risk and reduce the costs of potential fraud violations, companies should evaluate their current compliance programs to see if they need to strengthen internal reporting systems and investigative procedures. Senior leaders and compliance executives should ask the following questions when evaluating their companies’ programs:

Is there a strong code of conduct and policies in place?
Are we consistently renewing education, awareness and certification?
Are we consistent with our case management procedures?
Do our whistleblower procedures enable us to distinguish between valid and specious claims?
Are we measuring the effectiveness of our compliance programs and hotline?

Companies should consider the abovementioned areas when contemplating additional methods by which to effectively prevent fraud and address claims.

For more information on compliance services and solutions, please go to http://www.bdoconsulting.com or www.tnwinc.com.

The original version of this interview appeared in the September 12, 2011, issue of Compliance Week. Click here to view the original version.

Glenn Pomerantz is a partner in the New York office of BDO Consulting. He is a Certified Public Accountant and Certified Fraud Examiner with 27 years of forensic accounting, auditing and consulting experience. Pomerantz co-leads the firm’s Anti-Corruption Compliance and Investigations practice, focusing on international fraud investigations pertaining to corruption, embezzlement and theft allegations, as well as financial reporting fraud.

Luis Ramos is the chief executive officer of The Network, Inc., where he has led the company’s transformation into a leading governance, risk and compliance solutions provider. Mr. Ramos has more than 20 years of experience in risk management and compliance, and his thought leadership has been featured in publications including National Underwriter Magazine and Risk Management Magazine.

This article was originally published by BDO Consulting in Viewpoints on December 9, 2011 and is available at http://www.bdoconsulting.com/resources/publications/BDOC-Viewpoints Newsletter-2011-Issue 2.pdf.

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