Hotline Cools Crooks

Anonymous hotlines are valuable tools in the fight against the $600 billion a year problem of workplace theft, writes Rhys Stacker.

It’s often been said that an organization’s success is due to its employees. Yet employees, from the lowest customer service representative to the senior executive, are costing US organizations more than $40 billion a year through theft.

If fraud is included as theft, the figure rises to more than $600 billion. In the retail sector alone, employees are responsible for half the total cost of shrinkage, estimated at $30 billion a year.

Employee theft ranges from the basic, such as stealing goods, to the creative and highly sophisticated, including fraud and forgery. Neal T Buethe, an attorney within Briggs & Morgan’s labor & employment division, defines employee theft as “any intentional misappropriation of employer property”, for example, inventory, fixed assets, currency checks or trade secrets.

Given their knowledge of internal systems and, in some cases, positions of authority, it is not surprising employees rip off companies to the tune of $4,500 per person per year. Insurance fraud is often described as a low-risk, high-yield crime, but occupational or employee theft promises the ultimate in returns, often for very little risk.

Contrary to the views of many employees, internal theft is not a victimless crime. Theft reduces profits and makes companies less competitive, costing jobs. It can cause organizations to fail.

Research shows the average loss to internal fraud, the most common and expensive form of employee theft, for a business with fewer than 100 employees is $125,000 a year. The figure is identical for corporations employing more than 1000 staff. However, the smaller business is less likely to absorb such a massive loss.

Given the internalized, secretive nature of employee theft, organizations struggle to detect, investigate and stop it. Even the most proactive organizations that make regular use of auditing, undercover operations and other expensive and time consuming measures may not uncover all thefts.

But there is a successful, non-intrusive, cost-effective method available to cut employee theft. Anonymous or whistleblower hotlines are telephone or email-based services that give concerned employees opportunities to provide information on theft and other criminal activities happening in the workplace without fear of retribution.

According to the Association of Certified Fraud Examiners (CFE), tip offs from staff (and customers and vendors) are the most common method for detecting internal fraud, accounting for 46% of detections. The CFE says organizations with an anonymous reporting service will cut fraud losses by 50%.

The Network, a Georgia, USA-based employment compliance firm, was a pioneer of the anonymous hotline. Founder Ralph Childs, a former FBI agent, realized during investigations into employee theft that there were frequently other employees who were aware of the crime.

The Network’s director of marketing, Adelle Erdman, says hotlines were a natural choice for the retail sector, where “internal theft is a persistent problem”. She also names very large, decentralized employers as benefiting from the service.

According to Ms Erdman, employees were “bothered by their knowledge of illegal activities, but didn’t want to report the situation face to face”. Mr Childs then piloted a successful program that encouraged employees to make anonymous phone calls to report employee theft.

Overcoming employee reluctance

The introduction of the Sarbanes-Oxley Act in 2002 boosted the reputation of hotlines. The legislation mandated for public companies’ audit committees to establish procedures to handle whistleblower complaints and provide protection to those who spoke out. Organizations have commonly interpreted this as providing anonymous hotlines.

The upside to the large-scale corporate collapses of 2002, including Enron and WorldCom, and the resulting Sarbanes-Oxley Act, is that employees are more aware of the effects of crimes like theft and fraud and the importance of hotlines in detecting criminal activity.

“The media attention given to the fall of Enron, combined with the focus on whistleblowers in Time magazine’s Persons of the Year cover story, has helped people realize a whistleblower is a person who is taking a stand to stop a harmful activity,” Ms Erdman says.

But for hotlines to be successful, administrators must ensure confidentiality is maintained. “Employees must feel certain their identity will be protected,” she says.

Wayne Bruce, director of Australian-based hotline service STOPline, says the service goes to great lengths to ensure employee anonymity is protected. “Safeguards are built into the STOPline process through codes and passwords that only allow contact by and/or with appropriate persons,” he says.

“The most important safeguard is the integrity of the people involved. The objective is to address the “message” and not the “messenger”. You won’t find the whistleblower if you don’t go looking.”

There have been concerns that whistleblowing would be associated with dobbing or being a tattletale, therefore making workers reluctant to report information. But Deloitte Touche Tohmatsu’s Deloitte Forensic division national partner Tim Phillipps says employers and employees quickly got over that hurdle.

“Contrary to Australia’s ‘don’t dob in a mate’ culture, Australian corporates are moving quickly to implement whistleblower hotlines to give employees the opportunity to report workplace misconduct,” he says.

“As long as employees are guaranteed they can remain anonymous and are confident corrective action will be taken as a result of their tip off, they are more than willing to call the hotline.”

Deterrence value

Hotlines don’t have to be a reactive solution to an already established problem of theft or fraud. Eugene Ferraro, president of Colorado-based Business Control Inc, says the deterrence mechanism they provide against employee theft is extremely valuable.

“For example, if I work in a small office side by side with a co-worker and I know he has access to that hotline, I am less likely to try anything,” Mr Ferraro says.

“What’s more, even if the person in that cubicle next to me didn’t care what I did, I’m sure there would be plenty of people in the organization who do care and would report me for any illegal activities.”

Cost benefit

The relatively inexpensive cost of a hotline is attracting organizations from the private and public sectors. Many services cost less than a dollar per employee per year, which is a bargain compared to the cost of a full internal investigation.

Mr Ferraro says: “You compare that to a fraud examiner who bills $300 an hour and you might need three of them working on a case eight hours a day. The cost builds up quickly. It can get very, very expensive.”

Anonymous hotlines aren’t a stand-alone method to detect and prevent theft. But they are an inexpensive, effective solution against employees engaging in fraud, embezzlement and other thefts, provided they are used in conjunction with strong, cohesive anti-theft policies.