Best Practices for Ethics Hotlines
By Tony Malone, CEO, The Network
One of the many effects of the Sarbanes-Oxley Act of 2002 is that thousands
of public companies are now considering offering their employees an anonymous
hotline. This is an important step toward minimizing losses due to fraud.
The Association of Certified Fraud Examiners found in their 2002 Report
to the Nation that fraud was detected by tips 46 percent of the time,
making tips the leading method for detecting fraud. The study also found
that organizations with a fraud hotline cut their losses by approximately
50 percent per scheme, presumably because the fraud was discovered faster
through the tip.
While internal audits, external audits and background checks also significantly
reduced losses, the greatest reduction in loss was associated with anonymous
reporting mechanisms, such as a hotline. There are many benefits to an
effective hotline program. Beyond the obvious financial benefit of stopping
fraud in its early stages, a hotline can give the company the opportunity
to limit liability regarding offenses such as discrimination. Also, uncovering
and dealing with issues before they are exposed in the media can protect
the company from the destruction of goodwill in the eyes of investors,
customers and other stakeholders.
If you are getting ready to implement your first hotline, there are
many actions that you can take to maximize its effectiveness.
Communication
Communicate to employees about behaviors that are not acceptable,
and how to report them.
A comprehensive program includes periodic communication to employees
and others about the behaviors that are acceptable, versus unacceptable.
This communication should include everything from articles on the company
intranet site to posters in break rooms to discussions at company meetings.
Supplying payroll stuffers for key vendors can be an economical way
to reach a second community in their homes. This type of communication
reinforces the recipient's perception that the company wants to uncover
illegal and unethical activities and address them.
Anonymity
Encourage employees to use internal channels, but let them know
they can remain anonymous by using the hotline.
Analysis of more than 47,000 incidents reported via hotline calls in
2002* showed that 48 percent of callers chose to remain anonymous. This
number may seem high, but it may be explained by another statistic: 33
percent of hotline callers had previously reported the incident to management.
The implication is that although the employee reported an incident,
the individual's manager either failed to follow up, or the employee
was not happy with the results.
Take the case in which the caller's own manager is involved in the cover-up
of serious misconduct. In this case, the anonymous report gives the company
a chance to intervene in a potentially volatile situation, possibly preventing
a costly lawsuit. A company that is serious about preventing fraud will
make every effort to give people an option for reporting that makes them
comfortable.
In response to Sarbanes-Oxley, some companies are adding a 3rd party
hotline in addition to an internal hotline to make sure they have given
employees every avenue for reporting malfeasance to the company, rather
than contacting an outside party like a lawyer or the media.
Call Handling
Have a trained interviewer handle the call.
There is no substitute for human interaction when dealing with an anonymous
caller, because there may never be another chance to gather information.
An anonymous caller typically feels threatened, and is in an emotionally
charged state, leading the individual to leave out important details.
A professionally trained interviewer will ask questions that help the
company gain enough information to be able to investigate the allegation.
To illustrate the importance of the interviewer, consider the consequences
of using an answering machine or a web form in place of a live hotline.
A caller can send a message that says "My manager is ripping off
the company. He's stealing a lot of money. You need to stop him." If
the company has thousands of employees, there may not be a practical
way to follow up on this tip.
This same person talking to a trained interviewer will be asked to answer
several questions, like the location, the manager's name, how is the
theft occurring, how often it occurs, the dollar value involved, are
there other witnesses, etc. The interviewer's goal is to create a thorough,
detailed report so the company can investigate the allegation.
Probing for details is what transforms a tip into an actionable report,
and this opportunity is lost without a live operator.
'Round the Clock
Offer professional service 24 hours a day.
Analysis of 2002 call volume at The Network shows that nearly 40 percent
of hotline calls happen outside of regular business hours. An employee
who wishes to remain anonymous will not feel comfortable calling from
work.
He or she will make the call from home at night or over the weekend.
Every call, at any time of the day or night, needs to be handled by a
trained interviewer, rather than an answering machine.
Expand Reach
Make the hotline available to all your corporate communities,
not just employees.
To be most effective, a hotline program must be comprehensive, involving
employees, suppliers, investors and customers. Different groups of people,
like vendors, may be aware of different types of fraud. For example,
employees of vendors might report fraud in the form of over-billing,
while others may report other types of fraud.
Tracking and Auditing
Create a plan that ensures that reports are sent to the right
people.
A report dissemination routine should be set up with the hotline administrator
so that issues like harassment are sent to Human Resources and/or Legal,
while issues like those mentioned in the Sarbanes-Oxley Act are sent
an appropriate representative of the Audit Committee, as well as to the
hotline administrator.
Sarbanes-Oxley codes you should have include Insider Trading, Improper
Loans to Executives, Retaliation against Whistleblowers, Conflict of
Interest and Accounting Irregularities.
This dissemination routine lets everyone know that you have done everything
you can to comply with the spirit of Sarbanes-Oxley and you are dedicated
to managing an ethical corporation.
* Source: The Network, Inc. internal data
Tony Malone is the Chief Executive Officer and co-owner of The Network,
Inc. Under his leadership, sales of The Network's core "hotlines" product
have tripled, and Malone has played a key role in securing strategic
partnerships with the Association of Certified Fraud Examiners and others.
Prior to joining The Network in 1998, Mr. Malone was President and
COO for Riscorp, Inc., where he led the company through a successful
IPO.
He previously served as Director of Risk Management for KFC (then a
PepsiCo company), Manager of Risk Financing for BATUS Inc., and in various
positions at The Upjohn Company.
Mr. Malone holds the Associate in Risk Management (ARM) and Chartered
Property & Casualty Underwriter (CPCU) professional designations.
He is a member of the National Association of Corporate Directors as
well as the American Society for Industrial Security.
Mr. Malone received an MBA in Risk Management in 1984 and a BA in Finance
from The University of Georgia in 1983.
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