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Research repeatedly demonstrates the usefulness of anonymous hotlines for uncovering illegal activity, helping to quash both financial losses and liability resulting from fraud.

Anonymous hotlines represent one of the best lines of defense for uncovering theft, fraud and high-risk activities. The ACFE study found that organizations without an anonymous reporting mechanism suffered median losses more than twice as high as organizations where anonymous reporting mechanisms were established. The report concludes that anonymous hotlines provide real, measurable anti-fraud benefits. The findings go on to state that, given the relatively low cost of a hotline compared with other anti-fraud controls, organizations would be well-advised to implement one for employees, contractors, vendors and the general public.

Another study demonstrates their impact within corporations. One of five American workers possesses personal knowledge of workplace fraud, according to a 2002 study sponsored by Ernst & Young LLP. Roughly 80 percent of the participants surveyed said they wanted to report unethical behavior, but less than half actually did. Nearly 40 percent said they would be more likely to make a report if they could remain anonymous, and 57 percent chose a hotline as their preferred method for doing so.

A hotline complemented by an effective communications program can accomplish even more. According to the National Business Ethics Survey of 2003, there is a strong correlation between communications programs and increased reporting of misconduct. When an organization communicates about ethics, employees feel more comfortable reporting issues of fraud.

ALL HOTLINES ARE NOT EQUAL

There are hotlines that work and hotlines that work well, and the difference between the two has a lot to do with the adoption of some key best practices. The Antifraud Programs and Controls Task Force of the American Institute of Certified Public Accountants offers help in this regard: a tool to help evaluate hotline effectiveness. Published in 2005, the AICPA's suggestions for cultivating a vigorous whistleblower program identify some key features that distinguish a good hotline from a mediocre one.

Good hotlines are available to callers 24 hours a day, seven days a week, and always are staffed by a live interviewer. Many agencies utilize an internal hotline that only operates from 9 a.m. to 5 p.m. and then kicks over to voicemail. Unfortunately, the quality of a tip might be diminished once a caller is relegated to voicemail. Consider that and the fact that roughly 50 percent of all hotline calls occur at night or on weekends. An individual seeking to remain anonymous might try to leave a very brief message by omitting critical details, which would otherwise have supported the investigation. Some callers might even change their minds and hang up when they reach an automated voicemail response, fearing that their voice or caller ID could be recognized. There is no substitute for a comprehensive, live interview for retrieving actionable information.

The best hotlines also utilize a standardized interview process. The power of a hotline rests in its ability to open the lines of communication with employees, contractors, vendors and the general public, and create venues for interactive communication. In most cases, individuals who call fraud hotlines are anxious and might provide information in a disjointed manner. An interviewer with specialized training can help callers remain calm and enable them to cover their concern thoroughly. Appropriate questions tailored to the type of concern being reported will help paint a clear picture and make it possible to investigate or otherwise resolve a higher proportion of cases. An expert interviewer using a standardized process can also spot inconsistencies and provide better investigative information.

Another feature of top hotlines is that they create opportunity for ongoing dialogue. Every year the insurance industry loses hundreds of millions of dollars to insurance fraud. The ability to clarify details is tremendously useful when investigating an allegation. Partial or conflicting information from an anonymous person can lead to frustration when it is too vague to be pursued.

To prevent this, a unique identification number should be assigned to each hotline report, providing a means for the anonymous person to call back. It is important to note that, while this two-pronged process can be helpful as investigations unfold, roughly 70 percent of anonymous callers never call back.

So obtaining detailed information in the initial report remains the crucial primary objective of the hotline, and another reason that a voicemail box falls short.

Hotlines should also automatically, rapidly and discreetly route gathered data to the proper recipients. Effective report-dissemination procedures might protect employees and other stakeholders from retaliation and safeguard investigators from accusations of improper handling. A good system uses a database that can automatically determine the correct recipient by comparing data such as the nature of the allegation and the location involved. Dual dissemination (having two or more people receive every report) can also act as a protective feature in cases where the accused party has a role in overseeing the review of fraud allegations. Accelerated notification of critical and time-sensitive issues is important, especially when the fraudulent activity is still in progress.

The purpose and confidential nature of a hotline must also be effectively communicated to guarantee that the hotline works up to snuff. An ideal communications campaign includes messages from senior management that demonstrate top-down support.

An "evergreen" aspect is also key: Posters should be displayed in high-traffic areas like break rooms and on the intranet, and updated often to draw attention to the program.

Providing all employees with an information packet explaining the hotline and its purpose will improve its effectiveness in both detecting and deterring fraud. Including hotline messages in customer and vendor invoices, on advertising and on Web sites will ensure that the general public is aware of the feedback mechanism as well.

Lastly, the ultimate purpose is to provide fraud reporters with confidentiality, so make sure the hotline assures users of that. The AICPA guidance regarding anonymous hotlines suggests the use of a third party for improving the perception of confidentiality.

An external process provides greater safeguards of anonymity because it eliminates issues related to caller ID and the ability to recognize a voice.

Outsourcing the process can not only help to address the anonymity issue, but it can also offer an economical alternative to an in-house process that is staffed 24 hours a day.

For insurers not using any hotline, consider one. For those who already operate a hotline, review its operations and adhere to documented best practices to ensure powerful results.

DAVE SLOVINis the vice president of business development at The Network Inc., a company that has provided third-party hotline services for nearly 25 years.

April 15, 2007

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