Hotlines and Fraud Detection: Changing Trends
If you suspected fraud at your organization, what would you do?
By Stephanie Bernard, Director, Advisory Services
If you are like many people, you might decide to report it. In making this choice, you might consider many factors such as your level of conviction, your fear of any reprisals, and options available to you for reporting the suspected fraud. Depending on your organization, one of those options may be a hotline.
A hotline is a mechanism that organizations utilize in order to facilitate the reporting of various concerns, including suspected fraud. Hotlines are often maintained by third parties, independent of the sponsoring organization. It is generally a best practice to allow hotlines to be anonymous, although not all hotlines are. Companies may also choose to make the hotline available to both employees and non-employees (such as vendors).
A hotline is considered an important component of an entity’s organizational compliance tools and an effective mechanism for detecting fraud. The Association of Certified Fraud Examiners’ (ACFE) 2022 Report to the Nations, the largest global study on occupational fraud, reports that tips are by far the most common manner by which fraud is detected within an organization. In fact, 42% of frauds are detected by way of a tip. The next most common methods of fraud detection are internal audits at 16% and management reviews at 12%. As the numbers indicate, companies rely on individuals coming forward to uncover any alleged fraud in their organizations.
Not only are hotlines the most common fraud detection mechanism, but they show an interesting correlation with fraud losses. According to the ACFE’s 2022 Report to the Nations, for organizations that have hotlines, the average financial loss due to fraud was $100,000. On the other hand, for organizations without hotlines, the average financial loss due to fraud was $200,000.1
When you think of a hotline, you may think of a telephone number. The word “hotline” is actually a direct reference to a telephone line. However, over the years, hotlines have changed their structure. For the first time since the ACFE began reporting on this topic in its Report to the Nations, telephone hotlines are no longer the most common type of formal reporting mechanism. In 2022, both email and web-based form hotlines have surpassed telephone hotlines in use. The below chart demonstrates the growth of various forms of hotlines.2
Millennials, which includes professionals through age 41, prefer alternative communication channels, when they are available, over the telephone.3 Millennials and the younger generations may be more comfortable utilizing tools like email or web-based forms for reporting an alleged fraud. Companies should evaluate their approach to hotline options in order to support the communication preferences of their employees and potential external tipsters.
No matter what form(s) of hotline companies make available, however, they will only be effective if employees actually know about them. I have worked with companies that have a hotline and whose employees formally acknowledged the existence of the hotline in writing. Yet, when I surveyed their employees about what they would do if they suspected fraud, very few mentioned a hotline or could even recall that one existed.
A hotline is only helpful if employees, and possibly external parties like customers or vendors, know how to access it. Organizations, therefore, should often remind their employees of the existence of hotlines and prominently display them in intranet and internet portals and other employee communication platforms.
Marcum’s Forensic Practice can assist organizations understand fraud risks, identify best practices for hotlines, and respond to allegations made via hotlines. Contact your Marcum advisory professional for assistance.
- ACFE 2022 Report to the Nations.
- ACFE 2022 Report to the Nations.