Argument (#3 March 2020)

The Role and Challenges of the Whistleblower System in the Corporate Sector

Nikolay Kolesnikov

The concept of the whistleblower (WB) system, also known as a hotline, has different meanings and interpretations. Put simply, this is the most powerful way of communicating and providing feedback on a companys operations.

In the corporate sector, and especially in international companies, this is an essential internal tool that can immediately highlight any violations or wrongdoings that may occur within the organization. Moreover, this system is highly effective not only as a means of detecting something that has already happened, but also as a preventative measure against fraud or other integrity-related issues. In order to make it effective, end users of this system should be independent departments directly accountable to shareholders or the Supervisory Board depending on the size of the organization.

According to the 2018 ACFE Report to the Nations, if a company has a proper WB system, up to 46% of all occupational fraud is discovered through it. This percentage and statistical data are mostly based on surveys in international companies, but it is not a common practice in the CIS region, especially among locally-owned businesses. For local businessmen and employees, it is sometimes difficult to understand the value of this channel and why it needs to be established and used.

In respect of shareholders in small and medium businesses, the following thought process is very common: Since I have trusted management and security, and sometimes even an internal audit, there is no benefit in having an additional protection/detection line that brings extra expenses.

As for employees, there are psychological issues related to a perception that effects the usage of this tool. The word whistleblower can have a negative connotation because of association with such derogatory terms as stool pigeon or snitch.

However, this attitude from both sides should be reconsidered given the facts and statistics proving the positive and important role of WB in the sustainability and growth of each business. An organization is a complex organism with a lot of processes, information flows and interaction of numerous elements. The overall efficiency of an organization depends on the effectiveness of its operation at all levels. The bigger the organization, the harder it is to control and measure its performance, even if it has an internal and external audit as well as an internal control department.

Employees at various hierarchy levels often have their own agendas. They try to use available resources for personal gain and hide it in the least controlled, unmonitored processes that have fallen out of the watch list of the above-mentioned functions or which are mired down in technical difficulties so numerous that they can easily deceive external supervisors. As a result, large internal schemes can continue undetected for years, significantly reducing the overall effectiveness of a business.

A properly implemented WB system can help to uncover the facts that have been missed by an internal or external auditor, security or compliance functions. The main idea behind it is that one cannot have an independent controller or watcher at all levels and for all employees and processes, because the cost would be prohibitively high and any such business model would be ineffective. To solve these issues, employees must have the right to express concerns, anonymously and directly, if something goes wrong. After all, there are always people inside or outside the organization who are aware of non-compliance practices in a company. To implement this, employees and any relevant external parties must be provided with the tools to report about issues (how to do it?), motivated to do it (why do it?) and guaranteed safety. Lets consider all three elements:

1) Tools. It depends on the size of the organization and the amount of subsidiaries and employees, but in general there should be an appropriately complex IT system containing a variety of communication channels such as email, telephone, and website, for proper recording, tracking and resolving of incoming issues.

2) Motivation. Regular training and education sessions for employees and external parties are required to help them understand that any inefficiency caused by internal wrongdoing will, one way or another, influence all of them. For internal employees, this can take the form of bonus cuts, non-transparent advancement or even absence of promotion, closing of ineffective departments or subsidiaries, etc. For external parties, it can be the loss of a contract due to unfair bidding. Some companies have tried introducing additional remuneration for reported wrongdoings, but this leads to additional risks like false reporting. Consequently, this practice is very uncommon in the corporate sector.

3) Safety. Due to the high sensitivity of information, which can influence people occupying different positions within a company, guaranteeing the protection and anonymity of the informer is of paramount importance.

Furthermore, it is crucial to have a proper internal policy and guidelines explaining everything mentioned above in detail, in order to make this communication channel as well as all the processes behind it more understandable and transparent.

However, this is just the first step to success. The next challenge is related to operations. At this stage, the most important task is to show that all relevant incoming information has been properly considered and that all required and appropriate decisions have been taken. If you motivate employees to report, build a communication channel and guarantee safety, but then your team fails to respond, investigate or take action, all trust in this channel will be lost very quickly. Therefore, you need an appropriate internal infrastructure consisting of the following:

Persons who will collect all incoming allegations.

Persons who will lead investigations and prepare reports.

Persons who will be in charge of making and implementing decisions based on confirmed allegations.

Apart from the above, all companies need to be aware of the fact that once all employees and external parties understand that this channel works, they will try to use it to resolve almost all their issues. For example, sometimes an employee can have a hidden agenda behind accusing their manager of being a corrupt and unethical person. In actuality, such an employee may be trying to harm his or her superior, because of a recent negative assessment of their work which has cut their bonuses significantly. Thus, proper investigation of all incoming allegations is an essential part of the WB system.

By way of conclusion, the WB system is a very powerful tool that helps to increase effectiveness and assurance in business operations, but only if it is created and used in a systematic way as a key element of corporate governance.

Nikolay Kolesnikov, ACCA, CIA, CFE, partner at COSA

The Ukrainian Journal of Business Law

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