One of the more challenging aspects of regulatory compliance is measuring the return on investment (ROI). Efforts to measure ROI on compliance expenditures have historically been in terms of the cost savings of disasters averted. During uncertain economic times such as many organizations are now facing, the CFO will likely be unmoved by a “disaster averted” analysis to measure ROI. NAVEX Global and George Washington University (GWU) published a study for which NAVEX provided a sanitized version of its trove of 3 million hotline alerts to GWU for their study on the use and efficacy of internal whistleblower systems.
In last week’s episode of Fraud Eats Strategy, I discussed the results of the GWU study with two subject matter experts: NAVEX Global’s Chief Compliance Officer Carrie Penman and the author of the report, GWU assistant professor, Kyle Welch.
The study examined 3 million alerts spanning a 14-year period and revealed a connection between active hotlines and business performance. Some surprising results included the fact that larger firms handling a greater volume of hotline reporting produced hotline alerts of higher quality. In addition, some hotline reports included feedback and suggestions that organizations can use in tandem with other mechanisms such as employee surveys to receive unvarnished input into how the company is doing and identifying potential areas needing improvement. But perhaps the biggest surprise coming out of the study is this fact: Companies with active hotlines are involved in fewer lawsuits and pay fines well below the amounts paid by companies with less active hotlines. To be more precise, organizations with active hotlines pay 20% less in legal costs and fines than their counterparts whose hotlines are less productive. The likely explanation is active hotlines coupled with a thorough investigative process enable organizations to get ahead of their problems and solve them, thus leading to smaller losses and lower legal and compliance costs in the long run.
Firms that have more active hotline systems also have more of the attributes associated with effective compliance programs and high performing organizations. Including higher quality governance and less entrenched management. They are typically larger, older and more profitable firms. The inverse was true for those firms with less active hotlines in place.
Carrie explained that while reporting systems themselves have stayed consistent throughout the 14 year period comprising the study, the organizations themselves have gone through some significant changes. One change is part of what guided this study – organizations are far more focused and reliant upon automation with the ability to collect, assess and analyze data. There has also been an increased emphasis and more widely accepted understanding of the factors underlying an effective compliance program. Perhaps the most important factor, and one we don’t talk about enough, is an improved focus on detecting and preventing retaliation. Also important is a strong commitment to hearing issues and protecting confidentiality. Equally important is clear and unambiguous leadership support for a “speak-up” culture and an unwavering pledge to conduct effective investigations.
Another dynamic shifting in recent years is absent transparency and the feeling of security, people are more willing to take their issues outside the organization to regulatory agencies or outside counsel. More than ever, organizations need to be nimbler in responding to the issues raised. Fast action is crucial due to the risk being amplified by social media and 24/7 news cycles. High visibility also brings pressure to take timely action. NAVEX Global’s own analysis revealed that cases resulting from hotline alerts close in approximately 45 days on average. In the age of instantaneous data and high expectations for accountability, 45 days is probably too long.
If active hotlines lead to significantly lower legal and compliance costs, we then examined what strategies organizations should implement to make their hotlines more productive. It is important for organizations to empower their people to challenge anything that could negatively impact the organization, its customers, employees and shareholders. Providing a forum for dissenting opinions and genuinely listening sets an organizational tone that everyone’s input is valued. In order to drive a higher volume of activity, there is a need for clear and ongoing communication about the various reporting channels available to employees. Employees must feel encouraged to speak freely and the company must proactively address employee fears of retaliation. In order to have the kind of active whistleblower hotlines that lead to lower litigation costs, organizations must address the issues that prevent employees from raising their concerns in the first place.
There’s been a notable uptick in COVID-19 related fraud. In recent weeks, the SEC reported a 35% increase in the hotline tips that they’re receiving alleging accounting fraud since mid-March. Whistleblower hotline activity is often a bellwether for crime trends that have yet to play out in the criminal and civil dockets. NAVEX has observed an increase in COVID-related alerts which peaked during the week of March 15 coinciding with the widespread issuance of “stay at home” orders:
- Between March and May, Environmental, Health and Safety complaints surged 111% over the period of January and February.
- June witnessed a 67% increase in accounting related alerts.
- Much of what has been reported related to COVID stems from concerns about social distancing, lack of mask-wearing enforcement and safety concerns arising from workplace shift from homes back to an office atmosphere.
Carrie suggested organizations should look at their alert volume between March and May when COVID-19 alerts and activity spiked.
The NAVEX/GWU study revealed what previously eluded compliance officers; effective compliance programs deliver economic benefit. Simply having a hotline is not enough, but it is a step in the right direction. Giving employees visibility and transparency into the hotline and other confidential reporting channels is paramount, but the organizational culture must also encourage speaking up, fiercely protecting reporters’ privacy and taking an unambiguous stance on retaliation to reap the financial benefits of lower litigation costs.