According to the Association of Certified Fraud Examiners' 2010 Report to the Nations on Occupational Fraud and Abuse, 40% of fraud cases studied at public companies were detected by tips....that's 3-times as many as by any other method, like an audit for instance. So an ability to report fraud is the most important means of uncovering fraud. So it is especially egregious when the whistleblower hotline, the internal means of reporting fraud, is headed by a person who is involved in a massive fraud/coverup. This is exactly what happened at the Japanese based company, Olympus.
The Dodd-Frank Act allows for company employees to report wrongdoing to a whistleblower program at the Securities and Exchange Commission (SEC). Doing so could allow said whistleblower to enjoy financial rewards received by the government (SEC) if fines are levied as a result of a violation....it's a good incentive that could yield millions of dollars. Many corporations were against this provision because it would harm the existing Internal Whistleblowing programs. Companies, afterall, would rather discover wrongdoing inside the company and then determine the best way to handle it. But the Olympus case illustrates why it is important for employees to be able to reach outside the corporation to report wrongdoing.
The Wall Street Journal reported that two executives at Olympus Corporation who allegedly were behind the concealment of $1.5 billion in losses also oversaw the company's whistleblowing hotline. For more than a decade, Hideo Yamada and Hishashi Mori were allegedly able to hide bad deals in off-balance sheet, off-shore (think Cayman Islands) accounts. Had anyone reported the accounting wrongdoing, it would have landed in the laps of Yamada and Mori. Instead, the fraud was only uncovered when new CEO, Michael Woodford showed up for the job earlier in 2011 and wanted to know about exorbitant fees for advice on the acquisition of British medical equipment maker Gyrus Group. He also began questions other expensive acquisitions that Olympus had made in 2008. What happened to Woodford when he started asking questions? The Olympus board fired him in October 2011. Woodford, who is now cooperating with authorites in the U.S. and Japan, is making a bid to get his job back and turn Olympus around.
Other employees inside of Olympus also reported harassment as a result of using the Hotline. A Tokyo High Court awarded $28,000 to an Olympus employee who claimed he was harassed and transferred in retaliation for a complaint he made. Olympus, if you can believe it, is appealing the decision.
The concerns of whistleblowing outside the compay are worthy of being heard. No company wants to operate under the pressure that a disgruntled employee would go running to federal authorities on a whim. However, the Olympus case shows the challenges of having only a provision for reporting internally when the company one is working for has become like that of the John Grisham novel, The Firm.
