To blow the whistle or not blow the whistle: That is the question

Recent fraud surveys have consistently found tips to be the most common method of uncovering fraud. That said, how many organizations still don’t have an independent whistleblower or ethics hotline?

Recent fraud surveys, such as that released by the Association of Certified Fraud Examiners (ACFE) have consistently found tips to be the most common method of uncovering fraud. That said, how many organizations still don’t have an independent whistleblower or ethics hotline? And how many chose not to pursue criminal or civil litigation, even after a fraud has been substantiated? Arguably, a large percentage.

When I think about all the fraud investigations with which I—and my forensic accounting colleagues—have been involved over the years, I can’t help to wonder: how many fraud cases go undetected or unreported?

In this column I will further explore an idea raised in Brad’s January 2013 blog about employees who “blow the whistle” on fellow colleagues suspected of committing fraud.

While criminal and credit checks have quickly become standard operating procedure for pre-employment screening (particularly for senior hires), what will show up from a search when a former “fraudster” has not been convicted criminally? The answer, nothing.

I recall walking into one office on the first day of an investigation and was greeted with a look of shock (ok, it was more like ‘oh no, not him again…’) from one of the Finance employee’s faces when he realized who I was. For it was our forensic investigation at his former place of employment that ultimately uncovered a fraud of almost $0.25 million that he was directly involved in perpetrating. Did his employer know he was a fraudster? I am guessing not, given he was in the Finance Department of this new organization.

While I am not trying to be an alarmist, it is possible that you may be currently working with a former fraudster, who was never prosecuted.

In some cases, fraud is only uncovered after the perpetrator has left the organization. I recall one case where a “fraudster” left the organization, for reasons unrelated to the fraud. The fraud was only revealed when their desk was being cleaned out and an original “undoctored” vendor invoice was discovered. 

From an employer’s standpoint, fraud allegations raise several immediate issues, including:

  • Is the fraud currently ongoing?
  • Who is involved internally (and should they be terminated)?
  • Is there any collusion with external third parties (e.g. vendors)?
  • What evidence exists to substantiate the allegations and what steps do we need to take to identify, secure and preserve the evidence?
  • Who needs to be involved in the investigation, both internally and externally?

We have recently seen numerous high profile—driven by the level of media coverage, position of the fraudster, and dollars involved—fraud allegations surfacing at not-for-profits/charities, including at The Salvation Army and The Toronto Rotary Club, just to name a few.

For these organizations, the immediate financial loss and road to recovery is obviously of paramount concern and priority. But the reputational damage that can ensue from such events, is often irreparable. The fraud can either increase support (due to empathy) or eliminate it altogether.

Not only does the organization’s actions send a clear message to other employees, electing to “bury” the issue can have obvious adverse repercussions for both the current and future employers.

A company recently approached me that suspected an employee may be involved in fraudulent activity. When confronted, the employee resigned immediately and offered to repay the total “claimed” misappropriated funds. Firstly, if someone offers to pay back money in the absence of an investigation, what assurances does an organization have that they are fully aware of the extent of the fraud? Furthermore, if that employee walks away virtually unscathed, what discourages them from repeating their actions elsewhere?

From an employee’s standpoint, there are several factors that might help explain why frauds are not reported:

  • Fear
  • Retaliation
  • Job security
  • Guilt 
  • Alienation

Perhaps the term “whistleblowing” or “whistleblower” has too much negativity attached to it. It was recently suggested to me by a lawyer that we should consider using the term “disclosure hotline”, as that more aptly describes what organizations expect from its employees. I agree.

In order to encourage greater “disclosure”, some positive changes have been made to protect individuals. In the United States for example (as Canada is still a bit behind on this), not only are those who provide “disclosure” being afforded greater protection, the Securities Exchange Commission implemented “Securities Whistleblower Incentives and Protection”, which offers potentially large cash bounties if the “original” information provided voluntarily by the whistleblower, leads to successful enforcement or related action.1

In closing, I don’t believe in the concept of “once a fraudster, always a fraudster”. However, choosing not to “blow the whistle” on a colleague or pursue an investigation may not only have adverse consequences to your own organization, it can also affect future organizations that hire such individuals, who lack the “complete story”.

Let me sign off with the following thoughts directed to our American brethren: In case you are experiencing a sudden memory lapse, let’s not forget who holds the gold medals in both men’s and women’s hockey from the Vancouver 2010 Winter Olympics – Oh yah, Canada, eh!



About the Author

Edward Nagel, CPA, CA•IFA, CBV

Forensic accountant