...scandal became clear within matter of days: The bank had been warned about the behavior of one of its traders, Jerome Kerviel, who is now at the center of police inquiry.

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This type of situation occurs time and again. When an organization falls victim to a massive fraud, or its control framework suffers a spectacular collapse, or a huge yet unexpected risk cripples the business, in most instances someone knew about the danger beforehand. Sometimes that person tries to raise the alarm, but to little effect; other times the individual will remain quiet, perhaps not knowing what to do, or fearful of what might happen to him or her after speaking out.

Organizations can encourage such people to make their worries known by establishing formal whistleblowing procedures. Indeed, the U.S. Sarbanes-Oxley Act of 2002 requires publicly traded companies to have a whistleblowing process in place, and similar rules exist in other jurisdictions around the world. But do these efforts really make any difference, and what can internal auditors do to help ensure that their organizations have an effective approach to whistleblowing?

Evidence suggests that performance in this area is patchy, to say the least. Eight out of 10 companies around the globe say they have a whistleblowing policy in place, but only half of them say the policy is effective, according to a recent survey by professional services firm PricewaterhouseCoopers (PwC). In some geographies--notably Western Europe--corporate confidence in whistleblowing is even lower. Only U.S. companies say they are getting whistleblowing right--just about every U.S. company in the survey that has a policy in place says it is effective.

The survey also shows that whistleblowing accounts for only 8 percent of detected frauds globally. That's better than three years ago, when PwC ran a similar survey, but it still leaves whistleblowing at the bottom of the firm's league of fraud prevention tools. By comparison, 35 percent of frauds were stopped after an anonymous tip that didn't use whistleblowing procedures, and one in 10 were spotted by pure accident, according to the survey.

Nevertheless, a well-structured whistleblowing policy is essential in the fight against fraud, says Tony Parton, a partner in forensic services at PwC. When it works, an organization can use whistleblowing "to enlist the support of a potentially powerful ally--the workforce," he says. "While anonymous tip-offs serve an important purpose, the benefits of a formalized whistleblowing program should not be ignored."

WHAT'S IN A NAME?

What might improve matters? Ironically, perhaps, the whistleblowing effectiveness tip...

NOTE: All illustrations and photos have been removed from this article.




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