Why it's worth the whistle

The effects of corporate fraud can be devastating. I should know – I used to work for Arthur Andersen.

With the criminal trials of Enron executives well underway in the US, the ‘it could never happen in my organisation’ mentality still prevails. Ironically, it’s most common among those who complain about the ‘red tape’ of the revised combined code and the Sarbanes-Oxley Act, which came about as a result of this and other similar financial scandals.

Statistically, most people falling into this category are likely to have their opinions vindicated. After all, large-scale corporate failures remain rare. But are accountants missing an opportunity to add the value that they frequently talk about, but are often accused of not delivering?

With whistleblowing now firmly in the public eye, the requirements of the combined code appear straightforward enough. Companies with reporting years beginning on or after 1 November must have arrangements to allow staff to raise concerns about possible financial reporting improprieties.

Audit committees must ‘review the arrangements by which staff of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters …’. Meanwhile, the US Sarbanes-Oxley Act states that companies must ‘establish procedures for … the confidential, anonymous submission by employees … of concerns regarding questionable accounting or auditing matters’.

Companies should take this as an opportunity to review the whistleblowing policies they have in place, bearing in mind that the features that make a policy effective depend greatly on the nature and culture of each organisation.

Many people do not report their concerns because they ‘just don’t want to get involved’. They have families to feed and mortgages to pay, and will not come forward if they believe there is a chance that their personal circumstances will be adversely affected. The reassurance offered by the Public Interest Disclosure Act, which – within certain boundaries – protects employees who report their concerns, seems to be of little comfort to those finding themselves in difficult positions.

But there are some solid business reasons why whistleblowing makes commercial sense. Not only can it reduce losses through fraud and theft at the hands of employees, but it can also dissuade employees from feeling they have nowhere else to turn, and instead make damaging disclosures to the media and industry regulators.

Some public interest organisations insist that whistleblowing should not be an anonymous activity, and idealistically this is hard to contradict. The pragmatic view, however, must be that it is better to obtain information from an anonymous source than not to obtain it at all. This is the choice that organisations are faced with.

The most important feature of a whistleblowing procedure must, therefore, be that employees trust it. In that respect, the tone at the top of an organisation is critical to the effectiveness of a whistleblowing policy. In many boardrooms, the review of the policy will take place quickly and quietly and, with the compliance box ticked, whistleblowing will conveniently be forgotten.

There are a number of possible reasons for this: a belief that internal controls already in place make it impossible for employees to get away with fraud or malpractice; not really wanting to know what is going on behind the scenes; not wanting to change the status quo; or a fear that something untoward will be uncovered, reflecting badly on management. Are any of these arguments justified?

Even the strongest internal controls can be avoided if two or more collaborate, and not wanting to change the status quo is surely not the approach to business that leads to success.

More worrying is the possibility that those organisations that refuse to demonstrate an acceptable level of openness have something to hide. The time will come when, regardless of the combined code or the Sarbanes-Oxley Act, investors will punish organisations that do not implement effective whistle-blowing procedures.

In almost all cases of corporate fraud or wrongdoing, someone other than the perpetrator knows what is going on before real damage is done. If you sit on or advise an audit committee, make sure that someone is you.

Adam Griggs is a former police officer, chartered accountant and director of The Hotline Limited. Consolidate your whistleblowing policy
An effective whistleblowing policy is not only a statement of commitment to good corporate governance, it’s also a guide for employees on how to raise concerns. But one size does not fit all. The following policies will be at best ineffective and at worst damaging.

The dusty staff handbook
Everyone gets one when they join, but few read it and updates are not properly promoted around the organisation. A poorly communicated policy may as well not exist.

The telephone directory with the policy
Assuming a concerned employee finds their way to the policy, it needs to reassure them they are doing the right thing. Simply providing employees with a list of contact numbers will only create confusion. A junior member of staff is unlikely to want to telephone a senior executive to report concerns.

Everything you say will be taken in evidence …
Using phrases such as ‘calls are recorded for your protection’, or using answering machines will only dissuade employees from calling.

A whistleblowing policy review checklist offering advice to assist audit committees and management can be downloaded free at www.thehotline.co.uk.