by Mike Yankunas

Despite a financial institution’s best intentions or its faith in employees, fraud happens. It poses serious problems and imposes enormous costs on organizations. The question is what can you do to mitigate the risk, hasten detection, minimize losses, and protect your reputation?

Perhaps the most crucial element of an effective fraud prevention program is also the simplest one, that of implementing and maintaining a confidential fraud hotline. Just how important is a hotline to your overall risk management program?

According to the Association of Certified Fraud Examiners (ACFE) in its 2006 Report to the Nation, occupational fraud is more likely to be detected by a tip than by any other means of detection (audits, controls, etc.).

In addition, confidential hotlines have a measurable impact on a company's exposure to fraud. Organizations without a hotline suffered financial losses that were twice as high as those organizations with the reporting mechanism in place, according to the report. What's more, it took non-hotline companies nearly twice the time to detect fraud.

Fraud is also an equal opportunity offender, occurring in both publicly traded and privately held organizations. However, the report suggests that privately held companies have a more difficult time detecting fraud. Less than 25% of cases in private companies were detected through tips, whereas nearly 35% were detected by accident! This stands in sharp contrast to publicly traded companies, which have a 40% rate of detection through tips.

And if that hasn't yet merited your attention, perhaps this will—according to the recent report, there were more reported cases of fraud in the banking and financial industry than in any other industry in the country.

Since that isn't the number-one position any institution wants to be heralded for, it's time to recognize the benefits of a confidential hotline to identify fraud and reduce fraud-related losses.

Turn up the heat with an effective hotline

As the ACFE report suggests, organizations with hotlines can reduce their losses by half. They can also detect fraud faster, up to nine months quicker than those without a hotline.

Keep in mind that a fraud hotline isn't a definitive prevention program by itself. In fact, it should be just one component of many within your overall antifraud program and culture. However, it is very straightforward in its implementation and highly effective in its return on your efforts.

At the very outset, a financial institution should analyze whether to operate a hotline internally or with the help of a third-party resource. Either way, hotline operations must be independent from the institution's management. Next, an institution must address availability, capability, and confidentiality.

Availability. An organization should explore optimal hours of operation to reasonably accommodate callers. "Extensive" hours of operation are recommended to ensure availability. In fact, around-the-clock coverage is typically best since nearly half of all hotline calls happen outside business hours.

Capability. Receiving a tip represents an official notice of concern, so it's imperative that calls be handled by professionally trained interviewers. Hotlines manned by capable and experienced staff are the means of ensuring maximum effectiveness.

Confidentiality. More than any other factor, confidentiality is the most vital aspect of a successful program. Callers must be assured that their anonymity will be protected, allowing them to report suspected wrongdoing without fear of reprisal.

For this very reason, an internal hotline may automatically deter some employees from calling at all. Having to talk to an inside contact means employees may fear their identities will be revealed and worry about potential repercussions.

Building hotline awareness

Communication and training are equally necessary for program effectiveness. Employees must be made aware of the hotline, along with its purpose and importance.

An institution's board of directors, the executive team, all managers, and supervisors must lead the way in supporting fraud detection. If the hotline program is viewed as a significant responsibility by management, then employees will make serious use of the opportunity.

But employees aren't the only audience with which an institution should communicate. Customers, suppliers, contractors, and vendors all help to uncover fraudulent activities, and an institution would do well to widely publicize its hotline. In fact, the ACFE reports that of the successful fraud tips received, 11% of them came from customers and 7% came from vendors.

Ultimately, a successful hotline can be a powerful tool in an institution's overall risk management program. It's also a highly marketable brand position. Endorsing a hotline encourages ethical behavior and protects your organization and its customers.