Journal of Financial Regulation and ComplianceHow to encourage whistleblowingDavid Crook

Article information:To cite this document:David Crook, (2000),"How to encourage whistleblowing", Journal of Financial Regulation and Compliance, Vol. 8 Iss 4 pp.326 - 332Permanent link to this document:http://dx.doi.org/10.1108/eb025053

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How to encourage whistleblowing

David Crook Received: 22nd August, 2000

Expolink Europe Limited, Unit 9, Castle Combe Enterprise Centre, Upper Castle Combe, Chippenham SN14 7QE; tel: +44 (0)1249 784100; fax: +44 (0)1249 782121; e-mail: david@expolink.co.uk

Journal of Financial Regulation and Compliance Volume 8 Number 4

David Crook graduated from London Uni­versity, and has spent most of his working life in the service industries and between 1992 and 1998 he built up a company employing some 280 staff. This company was sold to a quoted plc in January 1998 enabling him to concentrate on developing Expolink Europe Limited.

David is now firmly established as one of the UK's leading authorities on setting up communication systems to help prevent and detect fraud and other malpractices within the workplace. His company, Expo-link Europe Limited, is the UK's leading supplier of an external whistleblowing hot­line service and has a track record of effective, secure call management and reporting services. Its current client base consists of many companies in the FTSE 250 index together with local authorities.

ABSTRACT

This paper, derived from a conference presenta­tion, discusses corporate fraud and the role that 'whistleblowing' can play in combating mal­practice. It examines why employees have been reluctant to 'blow the whistle' and goes on to suggest how employers can provide alternative ways for staff to raise their concerns. It con­cludes by looking at the impact of the 'whistle-blower protection' offered by the Public Interest Disclosure Act 1999.

INTRODUCTION What is whistleblowing? For employers, whistleblowing is generally understood to

be an act where an employee expresses a concern relating to a fraud, or other illegal or unethical conduct, outside the organisa­tion because, for various reasons, they do not feel able to raise the matter internally. For most employees, whistleblowing is when an employee reports anything, whether internally or externally.

The word whistleblowing carries with it some very negative associations and anyone who does blow the whistle is seen as a sneak, a grass, a rat and all manner of other names. Children are told by their parents not to rat on their brothers or sis­ters, at school they are told not to rat on their classmates and at work it is not done to rat on workmates.

Because of this culture, whistleblowing in business is often denounced as morally unjustifiable, on the grounds that it vio­lates the duty of loyalty and confidential­ity to the business and fellow workers. As a result, many employers still view whistleblowers with suspicion, not as the loyal bearers of critical information which they often are. Rather than actively encouraging employees to sound the alarm, many companies create a culture and procedures which actually deter employees from blowing the whistle. This is often because companies fear uncontrolled whistleblowing. Encouraging controlled whistleblowing is, however, good business practice. After all, would not most companies welcome the oppor­tunity to look into a matter rather than

Journal of Financial Regulation and Compliance, Vol. 8. No. 4, 2000, pp. 326-332 © Henry Stewart Publications, 1353-1988

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find the media or regulator bearing down on them or never finding out about the problem in the first place?

IMPORTANCE OF WHISTLEBLOWERS It is a startling but proven fact that most companies lose between 2 per cent and 5 per cent of their turnover as a result of fraud and that upwards of 25 per cent of the working population, from top to bottom, become involved in malpractice given the opportunity.1 Four out of five frauds are committed by staff, often trusted and long-serving employees — the essence of successful fraud is that honest people should never suspect.

A company may believe that its internal controls will not allow fraud to take place but the fraudster has the initiative: the fraudster has the time and motivation to pay attention to detail and can conceal their tracks among millions of innocent transactions. It is a very unequal battle; the fraudster only has to be lucky once or twice; the company has to defend success­fully all the time.

Corporate fraud is both a serious and per­vasive problem that unquestionably affects all organisations leading to enormous unrec­orded losses. What is more, 75 per cent of those frauds which are uncovered are found by chance (through anonymous tip-offs, whistleblowing, accident or change of man­agement) rather than by the most effective management or auditing procedures. This alone confirms that there is a lot more going on than is uncovered. An Ernst & Young international survey found that 84 per cent of frauds exceeding US$lm were com­mitted by employees.2 The survey also showed that most companies have weak controls for detecting employee fraud.

Most areas of a business are at risk:

— procurement and purchasing — advertising, sales, marketing and distri­

bution

— production and manufacturing — spares, warranties, field service and

maintenance — disbursements and expenses — receivables — credit and lending — computers, sensitive commercial infor­

mation and data.

INTELLIGENCE Good intelligence is a company's best defence and there is no better source of this information than from employees. Appro­priate procedures must be set up to capture this information by creating effective confi­dential communication links.

Why are confidential, secure mechanisms required? Most corrupt, illegal and immoral practices go undetected within any organisation because employees, aware these things are going on, fear the conse­quences of reporting them through existing internal channels. The problem is not lim­ited to fraud which costs UK companies over £15bn per annum (or £60m every working day). Are employees really aware of malpractice? Statistics taken from an independent survey of 4,000 workers clearly demonstrate the scale of the pro­blems facing companies today:

— 33 per cent had witnessed misconduct and unethical behaviour at work

— 56 per cent had heard people lying to their supervisors/managers

— 41 per cent had observed falsification of records

— 35 per cent had observed stealing and theft

— 35 per cent had observed sexual harass­ment

— 31 per cent had observed abuse of drugs and alcohol.

When asked why they did not report their observations, 54 per cent of workers gave fear of retribution or retaliation as their

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How to encourage whistleblowing

primary reason. Employees fear loss of pro­motion or worse, their job. This is not sur­prising taking into account another survey of 233 whistleblowers in the UK and USA which found that 84 per cent lost their jobs within three months of informing their company that a fraud was going on (to which they were not a party). Employees also fear for their personal safety and that of their families. The risk of speaking out and being identified is simply too great. In this way companies lose important infor­mation which would enable the fraud to be found.

Speaking out can be a dangerous occu­pation for any employee burdened with the knowledge of fraud, corruption or unsafe working practices. The Nolan Committee has underlined the potential importance of employee whistleblowers in uncovering serious wrongdoing in public bodies. It said: 'One of the conditions in which fraud and malpractice can occur . . . is the absence of a mechanism by which concerns can be brought to light without jeopardising the informant'.4

Many times in the past few years, public inquiries have been established to uncover the facts behind various scandals and disas­ters. In far too many cases these inquiries have revealed that employees knew some­thing was seriously wrong but either they turned a blind eye or, when they did raise their concerns, they were ignored or the information was channelled to the wrong people. Before the Herald of Free Enter­prise sank with the loss of 193 lives, staff concerns had been raised five times but middle management blocked the message from the board. Before the Clapham rail disaster in 1988 which killed 35 people, a supervisor had noticed loose signalling wires but had kept quiet for fear of rocking the boat. Following the BCCI collapse, the Bingham report found that the bank's autocratic management culture had ensured that no-one dared speak out about mal­

practices. One person tried — and he lost his job.5

Clearly, therefore, employees realise that there may be something seriously wrong within their organisation but often they do not express their concerns. This may be because they feel that speaking up would be disloyal to their colleagues or the orga­nisation, or they fear victimisation. They may feel that what might just be a suspi­cion of wrongdoing is not enough to jus­tify reporting the matter, or it may seem easier simply to turn a blind eye.

CONTROLLED WHISTLEBLOWING What can be done to encourage employees to come forward in a controlled way with their suspicions? High ethical standards today include the creation by business orga­nisations of clearly understood procedures and channels of communication, so that employees who are aware of illegal or unethical conduct or practices in the work­place are enabled to disclose them without fear of reprisal or victimisation. If this means altering a culture of misplaced loyalty to workmates, of turning a blind eye, or of cover-up, high ethical standards require that to be done, or at least attempted.

The first step is to break down any cul­ture of fear. If this is not done, the most carefully crafted procedures will fail. The process can be started by implementing a whistleblowers' policy which makes it clear that it is the duty of all employees to speak out about improper conduct and that it is the duty of management to act on those concerns. It is essential that the policy focuses not on how to control and restrict the spread of information but rather on creating channels through which informa­tion should flow.

The whistleblowing policy should also set out how the organisation will:

— support and protect whistleblowers from reprisals or recrimination

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— do everything possible to protect the confidentiality of the whistleblower

— inform the whistleblower about the action being taken

— protect individuals and the organisation from false, malicious or vexatious expressions of concern.

An essential part of both encouraging and allowing whistleblowers to be heard is to establish alternative ways for them to raise their concerns. Simply having a document will not solve the problem.

Whistleblowing methods Most organisations expect their employees to raise concerns with an appropriate level of line management and this is fine for a proportion of concerns. The most appro­priate person to contact will, however, depend on the seriousness and sensitivity of the issues involved and who is suspected of the malpractice. As was demonstrated by the Clapham rail disaster, the Herald of Free Enterprise disaster and many others, using the existing line management struc­ture is not enough on its own. Companies must recognise that this is not a failure of its management but merely human nature on the part of its employees. Why do people telephone the Samaritans when they could talk to their spouse, their families, friends, GP and so on? Generally it is because they prefer to talk to a complete stranger as this removes their fear and embarrassment, they know that they could pass the Samaritan in the street two min­utes later and neither would be aware they had just been talking.

Employees must be convinced that if they raise their concerns they will be taken seriously by the company. Employees are not convinced when all their company provides for communication of their con­cerns is line management — especially since it is sometimes their immediate line manager who is the problem and the

employee docs not know how far up the chain the problem goes. Easy accessibility to a designated board member or commit­tee of the board will start to give the right message — providing that person or com­mittee has the time and is in a position to investigate and resolve the complaint. The board member must be a non-executive director and a board committee should be made up exclusively of non-executives. This helps to convince the whistleblower that there is less likelihood of victimisation. Even this will not, on its own, get employ­ees to come forward because they lack, as they see it, the guarantee of anonymity — someone in the company will always know it was them who blew the whistle.

An additional option is to create a whis­tleblowing officer. This person must be outside the management chain but have the authority to go directly to the board when necessary. They should also have the authority to say 'I'll tell you what the pro­blem is but not who told me'. This suffers from the same shortcomings as the board member method and it can be very diffi­cult to find someone who is well known and respected within the organisation.

As stated earlier, 54 per cent of employ­ees who were aware of a malpractice did not come forward and report it for fear of reprisal. No matter how open and effective the management structure is within an organisation, there will be occasions when employees will not be prepared to report their concerns unless they have the reassur­ance of complete confidentiality. This can best be provided by setting up a telephone hot line. A hot line is not a panacea for all ills nor is it a replacement for existing internal communication methods but it is one more channel enabling sensitive issues to be communicated to senior management for the appropriate action.

Do hot lines work? The success of the government's benefit fraud hot line has shown that people do not like cheats, are

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How to encourage whistleblowing

prepared to do something to stop them if their own anonymity can be protected and, furthermore, that they are comfortable using hot lines as a reporting method. This coupled with the author's experience and that of similar organisations working in America clearly demonstrates that they do work. There are three main ways to estab­lish a hot line.

Establishing a hot line The simplest and cheapest way to set up a hot line is to provide a dedicated telephone number (preferably an 0800 number) which is well publicised to employees. (Hotline numbers must be well publicised because a concerned employee cannot very well go to their manager and ask what it is.) On the end of this line there is an answer phone on which employees can leave their message. This method has some serious limitations. First, there is no mechanism to enable the caller to be ques­tioned to obtain all the facts and to weed out malicious calls. Secondly, employees are put off because they are concerned about leaving an audible message for anyone within their company to hear and, as a consequence, identify them. Many employees are worried that their message will be played back to the alleged perpetra­tor who will probably recognise their voice.

A better alternative, is to set up a manned internal line. This overcomes many of the drawbacks of an answer phone but it can be expensive, especially if employees are given the opportunity to use it outside normal office hours or over weekends. In addition, most employees know that companies generally have an automated call logging system which would enable the company to see from which extension the hot line had been con­tacted. For this reason, many callers will ring when they are not at work, so having the dedicated telephone line unmanned

outside working hours (or covered by an answer phone) can seriously limit its effec­tiveness. And still employees will have reservations about calling an internal manned line for fear of being identified — they see the line as still being part of the company.

An alternative route, and one which is increasingly being used in the fight against fraud and other malpractice internationally, is to use an externally run 24-hour service.

The power of an external hot line is its simplicity and the fact that complete anon­ymity is assured, the caller feeling safe in the knowledge that they are dealing with an outside agency rather than another work colleague. Their security is guaran­teed by the fact that no-one within their organisation will know who they are and for this reason they come forward to make a report. The use of an external agency is cheaper when staffing costs, communica­tion materials, training etc are taken into account. It also works. The author is aware of one company which operated an inter­nal line covered by their head of security who answered the phone if he was about, if not an answer phone cut in and, over a period of more than four years, they took just 15 calls. In their first 12 months after introducing an external hot line over 160 calls were handled.

An outside agency is often able to obtain the name and a telephone number from the individual making the call so that should further information be needed the agency can go back to the caller. The con­tact number can also be used to feedback to the caller the progress or outcome of the investigation. Where the caller will not provide their details, they should be asked to call back after a certain time period which has been agreed in advance with the company. Interestingly, in the author's experience, callers will quite often allow their identity to be disclosed to their employer because, in the words of one of

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them, 'I didn't know who to talk to but knew if I called Expolink my concern would get through to the right person'.

Worldwide, external hot lines are prov­ing to be a valuable line of defence and it should be realised that they are not just a means for employees to report problems that have happened or are currently hap­pening. They can also prevent them from arising.

Malicious calls One of the arguments against hot lines is that because calls can be made anon­ymously they are an easy route for people to make false or malicious allegations. Thorough questioning by trained call handlers can minimise this problem and, of course, it is also possible for someone to send an anonymous letter to the chairman or MD if they simply want to cause trou­ble. Information provided in a call to any hot line is only the starting point for an investigation, it will not necessarily be pro­viding the hard evidence.

In the dictionary, there is a significant difference between anonymous (defined as 'of unknown name') and confidential (defined as 'entrusted with secrets'). For the employee in the unfortunate position of having knowledge of a malpractice, how­ever, their concern is that their company, their fellow employees and the alleged per­petrators remain unaware of who reported it. They do not always make the distinc­tion between anonymous and confidential. Creating a rapport and an ongoing dialo­gue with each caller helps to remove the cloak of anonymity but keeps the wall of confidentiality and this helps to ensure mal­icious calls are reduced to a minimum.

Public Interest Disclosure Act Legislation in the form of the Public Interest Disclosure Act (PIDA) will have a major impact on every business. PIDA became law on 2nd July, 1999 and provides the

strongest whistleblower protection in the world. It protects workers from being dis­missed or victimised for disclosing informa­tion they reasonably believe exposes financial malpractice, miscarriages of justice, dangers to health and safety, abuse in care, breaches of the Civil Service Code, risks to the environment and cover-ups. Victimised whistleblowers will be able to claim com­pensation at an industrial tribunal with awards being uncapped and any 'gagging' clauses in employment contracts will be void when they conflict with the PIDA's protection. PIDA even covers trainees, agency staff, contractors and home workers — even when the malpractice occurs over­seas. Some of the first cases have now gone through the courts and in one case a Mr Antonio Fernandes, who was sacked from his job after reporting that his managing director had been claiming unauthorised expenses, received £293,441 in compensa­tion. This case clearly outlines the potential damage to any company which does not take the issue seriously.

Establishing clear channels of communi­cation so that employees who are aware of a malpractice are enabled to disclose it without fear of reprisal or victimisation can help to protect a company from claims arising under PIDA. Clearly understood procedures are essential with employees being encouraged to use internal channels whenever possible. But there will still be times when employees will not use internal channels — and PIDA gives protection in defined situations to employees who do not raise the matter internally first but go outside because they reasonably believed they would be victimised by raising the matter internally. As well as providing clear internal reporting procedures, a com­pany's best protection may be to provide a controlled external reporting method using a third party agency. It could be difficult for an employee to argue in a tribunal that they went outside the company to blow

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How to encourage whistleblowing

the whistle because they felt they would be victimised if they used internal channels when the company has provided an authorised, confidential external mechan­ism for them.

BENEFITS OF ENCOURAGING WHISTLEBLOWING Sometimes, a company may feel that initi­ating a hot line would be seen to be against the company's culture. But employees see it as a positive issue, helping them to make their knowledge available to the appropri­ate person.

Companies that have a code of conduct for good corporate governance find that a hot line goes hand in hand with it. When both mechanisms are in place, they begin to create the behavioural changes within the organisation that are all about people understanding the openness of the culture and feeling able to share their knowledge. And they can do it in a safe and secure environment, which builds confidence in the way the company conducts its business.

When the size of the visible fraud pro­blem is considered, every opportunity must be given to encourage employees to

come forward and report their suspicions in a controlled manner. The best way to handle the problem is to provide legiti­mised routes through which individuals can express their concerns and these routes have to consist of more than simply report­ing the matter to their immediate boss. In today's markets can a company afford to let fraud and theft go on draining its finan­cial resources? In addition, company direc­tors, under the Companies Act 1995, 'have general responsibility for taking such steps as are reasonably open to them to safe­guard the assets of the company and to prevent and detect fraud and other irregu­larities'.

REFERENCES (1) Report written and undertaken by Ham-

bros Bank. (2) Obtainable from Ernst &: Young. (3) Survey undertaken by the Ethics Research

Centre. (4) Third Report of the Committee of Stan­

dards in Public Life, chaired by Lord Nolan. Obtainable from HMSO London.

(5) Reports into disasters commissioned by the Health and Safety Executive.

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