Statistics

Three studies done within the past few years point to one single corporate resource essential for preventing and detecting corporate fraud. The resource? Whistleblowers.
 

• The Association of Certified Fraud Examiners (ACFE) released a "Report to the Nation on Occupational Fraud and Abuse" in 2008. In the report 959 cases of American corporate fraud were examined. The findings were that because almost all cases involving fraud also involved concealment or attempted concealment of the crime insiders who blew the whistle were the most effective deterrent and detection method to uncover fraud. According to the report 46% of all these cases were uncovered by whistleblowers. The report recommended that corporate cultural changes should be implemented to explain to employees how fraud harms the entire organization, to train employees to recognize fraud, and to encourage employees to become whistleblowers.
• PricewaterhouseCooper (PWC) surveyed CEOs, CFOS and compliance executives from over 5,400 companies located in 40 different countries. The results of that study stated that whatever internal controls were put in place to detect fraud were not enough. The study also stated that whistleblowers and related activities uncovered 43% of corporate fraud. The recommendation was that whistleblowers need strong protection from retaliation and further encouragement to report fraudulent corporate activities.
• The "National Government Ethics Survey" of federal employees was issued by the Ethics Resource Center (ERC) in 2007. Its findings mirrored those of the ACFE and PWC, but the conclusions were different because of the nature of governmental structures and rules surrounding whistleblowing. The ERC concluded that federal employee environnments are increasingly conducive to fraud. The report also concluded that there would be a future increase in fraud if steps weren't taken to counteract the trend. Only 83% of those who reported fraud reported it to their immediate superior. The current Whistleblower Protection Act does not protect employees who report fraud to their supervisors. Of the remainder, only 6% reported fraud to someone outside of their department or agency or to a hotline.

Applicable Laws

The False Claims Act, which allows people who are not employed by government to file actions against any federal contractor they deem has committed fraud against the government, has been largely successful. The US Department of Justice Civil Fraud Division publishes statistics every year which demonstrate its effectiveness. Civil recoveries have increased to $2 billion in the year 2007. Documentation shows that the majority of federal fraud recoveries from fraudulent contractors are the result of whistleblower disclosures.

Another study published in the Boston University Law Journal stressed the importance of encouraging corporate fraud disclosure via financial incentives. Several possible methods of providing incentives to whistleblowers were analyzed. It concluded that the greatest incentive was offered by the qui tam model. Qui tam cases allow the uncovering of important inside information. The study concluded that in most cases the potential downsides a whistleblower might encounter were more than offset by the bounty award the whistleblower stood to gain.

Whistleblowers Protection

The ACFE, PWC and ERC studies, the False Claims Act statistics and recoveries, and the Boston U Law Journal study all present enough empirical evidence to show the value of creating an environment that protects and nurtures whistleblowing. There is a cultural bias against the activity of whistleblowers which should be actively discouraged because it's been proven to be inimical to fraud prevention and detection. When fraud is implicitly allowed by the absence of whistleblowing protections, it hurts everyone. Ensuring that consumers and taxpayers are insulated from the results of fraud requires strong and effective whistleblower protection laws.