Hot lines for employees to report colleagues are perhaps an employer's best way to detect occupational fraud within organizations, experts say.

“Providing individuals a means to report suspicious activity is a critical part of an anti-fraud program,” said John Warren, vice president and general counsel for the Association of Certified Fraud Examiners in Austin, Texas.

The ACFE has found that 40% of embezzlement in the United States and Canada is uncovered by employee tips. By contrast, external audits detected only 3% of the frauds reported in the ACFE's 2012 global fraud study entitled “Report to the Nations on Occupational Fraud and Abuse.”

“External audits should not be relied upon as an organization's primary fraud detection method,” according to the study. “Such audits were the most commonly implemented control in our study; however, they detected only 3% of the frauds reported to us, and they ranked poorly in limiting fraud losses.”

The fraud examiners association recommends that employers establish fraud reporting mechanisms, such as hot lines, to receive tips from internal and external sources on an anonymous basis. In addition, management should actively encourage employees to report suspicious activity, as well as enact and emphasize an anti-retaliation policy to protect whistle-blowers, the association urges.

Steve Campo, senior vice president and management professional services practices leader at USI Holdings Corp. in Dallas, said employers offer whistle-blowers rewards, which can provide an added incentive for employees to report suspicious activity.

“The Dodd-Frank Act has a personal whistle-blower incentive” for employees of publicly traded companies who report suspected financial fraud within their organizations, Mr. Campo said.

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“You don't want to build a culture of mistrust,” he said. “But if you have some incentive to weed out the bad actors, if it's well thought out and well designed, it could be a good risk mitigation technique.”

In addition to setting up fraud hot lines, the ACFE recommends targeted fraud awareness training for employees and managers as a critical component of a well-rounded program for preventing and detecting occupational fraud.

Most occupational fraud perpetrators exhibit behaviors that can serve as warning signs, such as financial, marital or family problems, Mr. Warren said.

“Or it may be the business owner or top executive is a 'wheeler-dealer' type,” he said.

In fact, when the owner or top executive steals from the company, it's generally a much bigger loss, Mr. Warren said.

“You steal what you have access to. If I'm a CEO, I've got the capacity to steal a lot more. We usually see fewer of these, but the severity is greater,” he said.

According to the ACFE report, 41.6% of the frauds occurred at the employee level, while 37.5% were at the management level and 17.6% were owners or executives. When an employee steals from his or her company, he or she generally takes about $60,000 to $80,000, according to the report. By contrast, managers take between $150,000 and $200,000 on average, while owners or executives get away with anywhere between $573,000 and $834,000.

Because behavioral “red flags” such as living beyond one's means or excessive control issues generally are not identified by traditional internal controls, the ACFE recommends that managers, employees and auditors be educated on these common behavioral patterns of potential perpetrators and consider them in tandem with other anomalies to help prevent and detect fraudulent activity.