The Problem

According to the 2016 “Global Fraud Study” by the global Association of Certified Fraud Examiners (ACFE)in March 2016, organisations typically lose 5 per cent of their revenue each year as a result of employee fraud.

Employee fraud is now so common that only its scale is remarkable. Stealing money or company property is the most common type, which includes cash theft, mislabelled expenses, false refunds, and theft of proprietary information and inventory. Financial statement fraud, however, usually causes bigger losses, and corruption cases tend to fall in the middle.

Perhaps surprisingly, whistle-blowing is still one of the most effective methods of identifying fraud and malpractice. Based on statistics, it is even more effective than the typical fraud-detection methods used by internal audit. According to the ACFE’s study, organisations with reporting hotlines are much more likely to detect fraud via tip-offs by employees (47 per cent) than those without (28 per cent).

Obstacles for reporting concerns

Unlike many other countries, there is no overarching legislation in Hong Kong that offers protection to whistle-blowers. Instead, there are piecemeal provisions under employment and criminal law that protect employees from being dismissed or discriminated against when they make a qualifying disclosure.

For instance, employees who provide a tip-off are protected from dismissal if the disclosure is in relation to corruption, bribery or proceeds of drug trafficking or if the disclosure is made as a result of the direction of the Independent Commission Against Corruption (ICAC). Similar protection applies if a disclosure or complaint is made under any of the Hong Kong anti-discrimination ordinances. An employee who gives information in any inquiry concerning enforcement of labour legislation, industrial accidents or breach of work-safety regulations is also protected from dismissal.

The inadequacy of this legal protection is one of the obstacles that deter employees from reporting concerns about fraud or corruption.

The Solutions

Despite the lack of comprehensive statutory protection for whistle-blowers, quite a few financial institutions and multinationals in Hong Kong have anonymous whistle-blowing processes that allow employees to report malpractice without fear of reprisal.

Effective whistle-blowing processes offer multiple channels or mechanisms for reportage, and require trained personnel to investigate concerns and deal with them sensitively.

From a cultural perspective, having a number of different anonymous reporting channels or mechanisms is important. This is because, for many companies in Asia, reporting concerns related to superiors is tantamount to betrayal of trust. As such, anonymous channels can alleviate some of the cultural or social pressure to avoid conflict.

To create an environment that is truly conducive to whistle-blowing, corporate culture is key and a top-down approach is needed. Senior management, including board members, should set the standard for behaviour expected of employees. This is typically set out in a code of ethics or anti-fraud policy that spells out those actions that constitute fraud, as well as the authority that will investigate irregularities, reporting procedures and disciplinary measures.

However, an anti-fraud or ethics policy does little good if not communicated to workers periodically. Consistent implementation of the policy is key, as every employee should be treated in substantially the same way when irregularities are found.

When suspicious activity is detected, management must respond in an appropriate and timely manner. Immediate response is critical, especially in the initial phase of the process.

To help businesses respond to suspicious activity efficiently aid this, there should be a fraud response plan, which guides necessary action and helps management in a consistent and comprehensive manner. This should be shared with all, to send the message that management spares no effort to combat fraud.

The Conclusion

No business is immune to employee fraud, nor can any business afford to throw away up to 5 per cent of revenue losses due to fraud and malpractice.

The key to combating this issue is having a strategy to deal with the risks effectively.

For this reason, businesses need to support employees who report concerns using internal mechanisms, as fraud can potentially cost businesses millions in revenue each year.

This article appeared in the Classified Post print edition as Stay on the front foot to combat employee fraud.