Stop Fraud, Look Smart, Listen to Staff

Communications providers have a distinctive risk profile. They make big, long term investments in technology whilst generating revenue from lots of microtransactions. They tend to have many customers and must satisfy a wide variety of customer expectations. Regulation counters the potential for monopolistic business practices, and telcos are obliged to provide levels of service that meet the needs of everyone from vulnerable individuals to the national economy as a whole. Some of these risk factors also encourage frauds which are peculiar to the telecoms industry. But not everything about telcos is unique, and telcos also suffer from the same kinds of fraud as found in other businesses. Whilst nobody ever stole from a bank by blowing on a toy whistle, there are plenty of generic frauds where telcos can learn about fraud management from non-telcos. Any company that produces accounts (and they all do) can suffer from accounting fraud. If a company has a supplier (and they all do) then procurement can be exploited. With this in mind, it is worth summarizing some recent research about a genuinely global fraud detection control: whistleblowing. (For the avoidance of doubt, whistleblowing is where an employee reports misconduct by someone else, and has nothing to do with toy whistles.)

The Ethics Resource Centre of the USA has made available a special supplement to the 2011 National Business Ethics Survey, entitled ‘Inside the Mind of a Whistleblower’. It makes a compelling argument that whistleblowers have their company’s best interests at heart. Far from the stereotype that whistleblowers are disgruntled employees with an axe to grind against the company, the majority of whistleblowers prefer to report their concerns within their own company. Only 3% of whistleblowers make their initial report to an external party. Those who reported externally did so because internal procedures were weak. The report states:

In companies without ethics advice lines and/or anonymous reporting mechanisms, the likelihood an employee will not report internally and will only report to an external location is three times as great.

The report concludes by observing there are six ways to promote internal reporting: increase awareness; promote the sense that whistleblowing is beneficial and will be acted upon; help employees feel secure; help employees develop a sense of connectedness; provide support to whistleblowers; and make it clear (by words, actions and decisions) that ethics is a corporate priority.

Whilst the NBES survey highlights how to encourage whistleblowing, a new report by the Association of Certified Fraud Examiners explains how beneficial it is. Their 2012 Report to the Nations on Occupational Fraud and Abuse is emphatic about the importance of whistleblowing:

Occupational fraud is more likely to be detected by a tip than by any other method. The majority of tips reporting fraud come from employees of the victim organization.

They found that tip-offs were responsible for detecting 43.3% of all frauds. The second and third most common sources for fraud detection were management review (14.6%) and Internal Audit (14.4%). The report’s recommendations go on to state:

Providing individuals a means to report suspicious activity is a critical part of an anti-fraud program. Fraud reporting mechanisms, such as hotlines, should be set up to receive tips from both internal and external sources and should allow anonymity and confidentiality. Management should actively encourage employees to report suspicious activity, as well as enact and emphasize an anti-retaliation policy.

The report found there is a significant benefit to implementing a reporting hotline. Organizations with a hotline detected 51% of their frauds via a tip-off. In contrast, tip-offs identified only 35% of frauds in organizations without hotlines. Organizations without hotlines relied a lot more heavily on accidental discovery and on external audit to uncover their frauds. Interestingly, national culture seems to have no significant impact on the importance of whistleblowing; tip-offs were by far the top source for fraud detection across all regions of the globe.

These two reports, when read together, make a very strong argument for whistleblowing being the most effective mechanism for fighting fraud in general. Telcos can gain a lot by sharing intelligence about the many ingenious frauds they encounter, but reducing fraud also means being solid at basic business fundamentals. When reviewing the efficacy of your fraud management strategy, ask yourself if your company has made the most of the simple and cheap ways to promote whistleblowing. Beneficial steps include having clear policies and procedures to support whistleblowing, training staff about how to report their concerns, expressing a strong and genuine commitment to good ethical conduct, and implementing a hotline which allows for anonymous and confidential tip-offs. In the communications industry, we have no excuse not to listen to our staff. Strong corporate ethics boost a company’s reputation, and will appeal to the best recruits. These two surveys show that listening to staff is not just important for a healthy business culture, it also significantly reduces fraud and boosts the bottom line.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.

2 Comments on "Stop Fraud, Look Smart, Listen to Staff"

  1. Great post!
    Expanding from Fraud to general RA issues….If we did a similar study on who first detected revenue-impacting problems in the company (problems that the RA department would classify as revenue-leaks), would the RA department also appear way behind, number 3 in the list? Behind the process-owner? the end-customers?
    It’s for sure, in a way, a very humbling survey for RA/Fraud professionals.

  2. I take the presence of a hot line as a sign of better tone at the top. As an internal auditor i consider it a red flag that the management is not willing to develop such fraud detection mechanisms to manage one of their primary responsibilities.

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