from Third Quarter 2009
Corporate Board Member
by John Greenwald
The tanking economy has spawned a dramatic increase in fraud, and with it a whole new area of risk for directors. And look who’s ready to ride to the rescue: the whistleblower. “More and more boards are coming to understand that whistleblower information can be used to manage risk,” says Bradley J. Preber at Grant Thornton, an accounting and consulting firm. Is your board one of them?
A number of studies suggest that insider trading, theft, embezzlement, corruption, and the like will continue to increase until the economy recovers. Deloitte Financial Advisory Services, for example, reports that nearly two-thirds of the 1,400 executives it surveyed last year anticipate a rise in various kinds of fraud in 2009 and beyond. This is already being reflected in more whistleblower activity. According to the Network, a Norcross, Georgia, outfit that handles outsourced whistleblower hotlines for a number of companies, reports of fraud accounted for 21% of the calls it received from its clients’ employees in the quarter that ended March 31, compared with 11% three years ago.
And let’s remember that whistleblowers know where the skeletons are. A 2008 biennial report by PricewaterhouseCoopers showed that these tipsters fingered 43% of the white-collar crimes committed at more than 5,400 companies worldwide in 2007. In contrast, internal audits unearthed only 19%. James D. Ratley, president of the Association of Certified Fraud Examiners in Austin, Texas, notes the same thing. “More frauds are detected by tips than by audits or other controls,” he says.
Whistleblowers can help manage risk in many ways. Effective hotline systems, whether they’re outsourced or handled in-house, include training sessions that put employees on the alert for various kinds of wrongdoing, such as reporting phony sales. Companies can then track whistleblower tips and slice and dice the data to identify the sources of risk and take corrective action. “Let’s say you’re getting a consistent number of complaints about a particular division or region,” says Grant Thornton’s Brad Preber. “You can react to that and send someone from management to deal with the problem.” In addition, he says, “almost every investigation will highlight certain corporate practices that are inconsistent with management’s idea of strong risk control.” Identifying these practices enables companies to get a handle on longstanding problems and fix them, thereby lessening risk.
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