Why Perception Matters Most in Preventing Fraud
Most corporate criminals don’t operate in the shadows, obsessively covering their tracks.
As part of management or as a trusted, longtime employee, they operate with impunity because they know they won’t get discovered. And in too many situations, they’re right.
That’s the uncomfortable truth.
If you want to prevent financial crime, or at least discover it early, a whistleblower hotline isn’t optional. When designed properly, it is one of the most effective tools an organization can deploy—both as a deterrent and as an early-warning system.
This post is not about theory or stats.
It’s testimony from someone who’s seen its power.
Ignore it at your peril.
Fraud Prevention Starts With Knowing That Someone Is Watching
A whistleblower hotline, independent and properly managed, changes behavior long before it receives a call.
Employees rationalize misconduct in predictable ways. They manipulate numbers. They override controls. They convince themselves that cutting ethical corners is harmless. All because they are all good at rationalizing. (See previous post: How Ordinary People Rationalize Extraordinary Crimes)
That calculation changes when they know anyone can report misconduct. It changes when reports can be anonymous. And it changes decisively when that information leaves the organization and into the hands of someone who is not afraid to do something about it.
Fraud thrives in secrecy. A hotline injects uncertainty. And uncertainty is kryptonite to bad actors.
Discovery Happens Because Insiders See What Systems Miss
Audits, controls, and analytics matter. But they all share the same weakness.
They look backward.
Financial crimes are intentional acts. The people committing them know where controls are weak. They know how to override them. And they know how to make bad activity look ordinary.
But coworkers see what systems miss. They feel pressure from management. They receive instructions that don’t sit right with them. They notice transactions that fail the most basic smell test.
A whistleblower hotline gives those employees a way to act—quietly, safely, and from the comfort of their own home.
They don’t need proof.
They don’t need to investigate.
They just need a trusted place to speak up.
Why an Independent Whistleblower Hotline Is Non-Negotiable
This is where many organizations fail.
A whistleblower hotline must be managed by an independent third party.
Anything internal—HR, legal, compliance, internal audit—will not be trusted. Employees assume their calls will be traced. They assume identities will leak. They assume careers will quietly stall.
Often, they’re right.
Without independence, the hotline becomes a compliance prop.
With independence, it becomes a weapon against misconduct.
Whistleblower Protections Aren’t Optional
Fear of retaliation is the number-one reason people stay silent. (More on this in an upcoming post on the MN fraud that has garnered so much attention.)
That’s why whistleblower protections exist at both the federal and state levels. These laws prohibit retaliation against employees who report suspected wrongdoing. They provide remedies when retaliation occurs. And in some cases, they offer financial incentives for reporting serious violations.
But laws don’t create trust. Culture does.
Organizations that want the truth must publicly and consistently enforce a non-retaliation policy. They must discipline retaliators, not the callers. And they must prove through action—not policy—that speaking up is safe.
Once retaliation is tolerated, even quietly, the hotline dies.
A Warning From the Field: Why Perception Beats Accounting Controls
I’ve told this story countless times—to executives, boards, and audit committees.
Nobody fears routine audits. Not internal audits. Not external audits.
Why?
Because everyone knows that most auditors—excellent professionals though they are—are not trained forensic investigators. They test samples. They confirm balances. They don’t hunt intent. They usually trust before they verify. I would know. I uncovered a massive leasing scam during my first public company audit that previous auditors had missed. That audit led me into the field of forensic accounting investigation. You can read the fictionalized account of how it all went down in my first novel, Sunday Night Fears.
My many fraud investigations that followed failed audits are why I agreed to become the lead author of A Guide to Forensic Accounting Investigation, published by Wiley in the wake of the Enron and WorldCom scandals. Organizations needed something very different from traditional auditing.
Let’s say red flags surface at some point. Something’s off. Here’s what I often tell executives who rely solely on their current control systems to detect fraud.
Announce internally that you’ve hired a small team of forensic accounting investigators, then tell them this:
“They’ll be here all week.
They’ll be interviewing staff and requesting documents.
Please cooperate fully.”
My staff and I could sit in a windowless office, making document requests throughout the week. Boxes get wheeled into the room. Interviews get scheduled.
Outside our office, people are talking….
“Did you hear? Forensic accountants are here.”
“What are they looking for?”
“No idea—but they keep asking for documents.”
“I saw that. They just scheduled an interview with Hank in accounts payable.”
Concern spreads throughout the department.
And what are the forensic accountants doing inside the room?
We could be watching the World Series on TV and eating pizza all week.
We wouldn’t need to open a single box… look at a single document… or talk with anyone.
So what did we accomplish?
We deployed the most effective fraud-prevention technique that exists:
The perception that wrongdoing will be detected—and the consequences will be severe… just the perception.
Of course, that scenario would never happen. We’d quietly interrogate data in ways auditors never do; then the interviews would begin; then the fraud would be exposed to daylight. Pizza would come later.
I was just trying to make the point that perception alone increases the perceived likelihood of detection by 10x. And when people believe they’ll be caught, most crimes never start.
Truth be told, over my three decades of conducting financial crime investigations, every case resulted in the discovery of material fraud. Unfortunately, not every one of them resulted in the bad actors receiving justice. Sure, they were forced to resign (not fired due to litigation risk). Few were prosecuted. And, of course, they went on to commit fraud at their next employer. (More on that in one of my future blog posts.)
Board Oversight: Where Responsibility Ultimately Lives
This is where boards often misunderstand their role.
Installing a whistleblower hotline is not a management task.
It is a governance obligation. It’s why they have a seat on the board. To govern.
Boards and audit committees must ensure the hotline is independent. Reports must bypass conflicted management. Retaliation must be tracked and punished. And patterns in complaints must be actively reviewed at the board level—not quietly filed away or ignored.
A silent hotline is a red flag. It means your employees don’t feel safe in picking up the phone.
A trusted hotline is an asset.
Give them cause to feel safe, and that phone will ring. Every employee and every vendor should be informed of that whistleblower hotline—at least annually, in writing. Signage posted.
Organizations should require all employees and vendors to sign a brief declaration, at least annually, acknowledging that they understand the whistleblower policy, know how to report concerns, and commit to promptly reporting suspected misconduct. People are generally honest; signing such a statement prompts them to pause, reflect, and often choose the right path.
If the board doesn’t demand credibility, no policy will create it.
Throughout my career, the biggest cases I was called on to investigate began with a whistleblower hotline call. And in every case, the whistleblower eventually came forward to us as we were investigating the allegations, pointed us in the right direction, and the bad actors were dealt with.
It’s one of the reasons I decided to begin writing novels after I retired. Each of those novels, now comprising the Sam Halloran Trilogy, was inspired by my real-life investigations… It all began when One Honest Soul (Book 2 in the series) at the company saw something wrong and decided to pick up the phone, feeling safe to do so.
Whistleblowers don’t exist because organizations plan for them.
They exist because something already failed.
Final Thought
A properly designed hotline won’t replace strong leadership or ethical culture. But when controls break down—as they sometimes do—it may be the only mechanism left that can stop a bad situation from becoming tomorrow’s headline.
If you want to prevent financial crime, make people believe someone is watching.
If you want to catch it early, give them a safe way to report it.
Everything else is window dressing.
Tom Golden
In future posts, I will cover areas just touched upon here:
- Minnesota Fraud—Just the tip of the iceberg
- How forensic accountants draw out the whistleblower
- Why most white-collar criminals walk—even after confessing
- How I was able to uncover the fraud that brought that public company down
