Carefully investigating internal complaints can help reduce exposure to fraud, according to an article by William H. Maruca, Esq. and Carl J. Rychcik.

An excerpt from the article notes that:

"A recent study by the National Whistleblowers Center found that 89.7 percent of employees who eventually file a lawsuit, such as a False Claims Act case, initially reported their concerns internally, either to supervisors or compliance departments."

In other words, properly responding to and addressing issues brought to light by employees can help employers reduce fraud risk and subsequent lawsuits. The authors highlight two key measures in particular for reducing internal fraud.

Make sure you have the right issue reporting forms in place, such as an incident report. You can download a free template here.

The first is having an internal compliance program in place. Second is carefully investigating any complaints and responding appropriately. Together, these measures can help a company resolve a situation before it enters the courtroom.

Implement an Internal Compliance Program

Reducing fraud risk is a much easier task with the help of an internal compliance program. A successful program will have five key elements:

• Leadership and an active commitment from the top
• A risk assessment with a clear understanding of the company’s high-risk areas
• Standards and controls such as a Code of Conduct
• Education and training for employees, management and employers
• An internal hotline for anonymous reporting of compliance issues

The last element, a hotline, is often considered the most important. A recent study found that nearly half of fraud cases are reported by an internal whistleblower, and that companies rely on whistleblowers for fraud detection more than any other method.

Get started on an internal compliance program with our Code of Conduct template.

But to truly reduce fraud risk, the employer needs to create an environment where whistleblowing is praised, not punished.

Protect Whistleblowers from Retaliation

Even with federal protection policies in place, whistleblowers often face severe consequences in the workplace for reporting issues.

Cifas asked employees what would encourage them to raise concerns internally. Top responses included a commitment from the employer to protect their anonymity, protection from retaliation and a promise to investigate.

This is why it’s important to implement in-house policies with anti-retaliation language and protection for whistleblowers. But implementation is only half the battle for reducing fraud risk.

Take it a step further with an overall corporate culture that helps employees feel comfortable raising issues, not afraid. As the key defense in the fight against fraud, internal staff require encouragement and support from the top to be involved.

Refusing to enforce policies or, even worse, ignoring them altogether, can do more harm than good. If an employer punished a whistleblower for a report (through harassment, termination of employment) the “forgotten” policy can be used against the employer in a court of law.

Employees refuse to voice their concerns because they have doubt that the issues will be dealt with properly (or at all). This assumption of doubt brings us to the second key measure for reducing fraud: investigating all complaints.

Investigate all Claims

According to the Kroll Global Fraud and Risk Report, a quick response limits financial and reputational damage and may even help to recover losses. 

Failure to take complaints or issues seriously can backfire quickly on an employer. Launching an internal investigation for the complaint can determine whether a violation exists and will clarify next steps.

An employee will feel less inclined to escalate an issue if their complaint is properly acknowledged. If your response is satisfactory in the complainant’s mind, you are minimizing the consequences for all of those involved.

Maruca and Rychcik advocate for involving legal counsel during the internal investigation process. Legal counsel has the knowledge and skillset to identify solutions and come up with appropriate corrective measures.

On the rare occasion that an internal investigation didn’t solve the matter and litigation is necessary, the employer will reap the benefits of having gathered evidence while it’s still fresh.