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The Importance of Whistleblower Mechanisms and Protecting WhistleblowersThe Institute of Internal Auditors – Calgary Chapter—March 20, 2019

2© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

IntroductionsPaul Ross CPA, CA, CBV, CFE, CFFSenior Vice President, KPMG Forensic

– Practice focus – Investigations and Dispute Advisory

– 25+ Years in KPMG Forensic

– Accepted as Expert Witness 25+ times, both civil and criminal

– Recognized by Who’s Who Legal

Jason Armstrong CPA, CA, CFE, CFFSenior Manager, KPMG Forensic

– 15-years experience in forensics

– ABC investigations

– Fraud and wrongdoing investigations

– Shareholder/contract disputes

– Fraud risk management


Agenda1. Recent trends in fraud detection related to whistleblowing and the

importance of reliable whistleblower mechanisms

2. Key components of whistleblower protection policy

3. Best practices for communicating your safe-disclosure policy and developing a corporate culture that promotes ethical conduct

1. Recent trends


Recent Trends - Detection

0

5

10

15

20

25

30

35

40

45

50

Tip Internal Audit ManagementReview

By Accident

Occupational Fraud - Method of Detection (%)

2018 2016 2014 2012

Tips are consistently and by far the most frequent method of fraud detection

Internal audits and management reviews are inherently focused on specific areas, and therefore fraud detection can be limited

Source: 2018 and 2016 Report to the Nations on Occupational Fraud and Abuse. Association of Certified Fraud Examiners, Inc.


Recent Trends – Sources of Tips

Employees are the top source of tips that lead to the detection of fraud

External stakeholders also need to be considered as potential sources

The ability to receive tips anonymously can also be fruitful

Employee

Customer

Anonymous

Vendor

Other

Competitor

Owner

0 10 20 30 40 50 60

Source of Tips

2016 2018

Source: 2018 and 2016 Report to the Nations on Occupational Fraud and Abuse. The Association of Certified Fraud Examiners, Inc.


Recent Trends – to Whom Tips are Reported

Wide variety of parties and offices within the organization received the tips

Could lead to inconsistent approaches of handling and properly investigating the tips

Raises concerns of inappropriate disclosure of sensitive information

Direct Supervisor

Other

Executive

Fraud Investigation Team

Internal Audit

Coworker

Regulator

Board/ Audit Committee

0 5 10 15 20 25

Party to Whom Tips were Reported (%)

Source: 2016 Report to the Nations on Occupational Fraud and Abuse. © 2016 by the Association of Certified Fraud Examiners, Inc.


Recent Trends – Impact of Hotlines and RewardsImpact of fraud was reduced in cases where a whistleblower hotline existed and/or rewards were offered for whistleblowers.• Hotlines existed in 63% of cases (60.1% in 2016)

• Average duration of fraud was 12 months compared to 24 months where hotlines did not exist (same in 2016)

• Median loss of fraud was $100,000 compared to $200,000 where hotlines did not exist (same in 2016)

• Rewards for whistleblowers existed in 12% of cases (12.1% in 2016)• Average duration of fraud was 9 months (11 months in 2016) compared to 18 months

where rewards were not offered• Median loss of fraud was $110,000 ($100,000 in 2016) compared to $125,000

($163,000 in 2016) where rewards were not offeredSource: 2018 and 2016 Report to the Nations on Occupational Fraud and Abuse. The Association of Certified Fraud Examiners, Inc.


Importance of Whistleblowing MechanismsRecent stats demonstrate the impact of establishing proper reporting mechanisms

If set up and used properly, a whistleblower mechanism could pay for itself through reductions in fraud losses

Whistleblower mechanisms should be used to strengthen an organization’s anti-fraud regime, rather than replacing other fraud detection or prevention measures


Increasing Acceptance of Whistleblowers• Negative stigma fading in recent years

• High profile whistleblowers• Allan Cutler (Federal Government – AdScam)• Cynthia Cooper (Worldcom) and Sherron Watkins (Enron)• Chelsea Manning and Edward Snowden


Current Whistleblower Protection Measures

SOX 806 and 1107

PSDPA

Canadian Criminal Code S. 425.1

Public Interest Disclosure Act (AB)

Ontario Securities Commission S121.5

Covers SEC listed companies

Protects Federal Government employees

Whistleblowing to law enforcement

Covers public sector and MUSH

Provides reward to whistleblower and protects against reprisal for OSC listed companies

2. Key components of whistleblower protection


Organizations should want:• Employees to tell them about any suspected impropriety or corruption

• Employees to raise any concerns with the company directly rather than externally

• Employees and all levels of management to understand and accept that it is safe for staff to raise concerns internally

• Management to properly deal with any concerns raised

• Stakeholders to feel comfortable that the organization acts with integrity


Earning the Employee’s Trust is Difficult

Retaliatory measures historically faced by whistleblowers: • Isolation or humiliation• Threats – overt or implied• Creating a poor performance history• Dismissal, constructive or otherwise• Criminal prosecution


Whistleblowing policies should:• Encourage employees to feel confident in raising serious concerns and question

and act upon their concerns• Provide ways for employees to raise those concerns and get feedback on any

action taken as a result• Ensure that employees get a response to their concerns and that they are aware

of how to pursue them and know what to do if they are not satisfied with any actions

• Reassure employees that if they raise any concerns in good faith and reasonably believe them to be true, they will be protected from possible reprisals or victimization

• Clearly identify that it is not intended to be used for matters that have other more appropriate programs or reporting mechanisms (i.e. grievances, harassment)


Protecting the Whistleblower• Demonstrating support for whistleblowing and whistleblower protection through

ongoing training, workshops and announcements

• Ensure the confidentiality of the whistleblower is maintained at all times and where possible allow for anonymous reporting of concerns

• Properly document the policies and procedures for reporting and disseminating concerns including identification of potential conflicts of interest between the investigation team and the concerns or the whistleblower

• Clearly define and strictly enforce anti-reprisal policies

3. Communicating your program and developing the corporate culture


Common Pitfalls of Whistleblower Mechanisms

• Mechanism or hotline established then ignored

• Low number of calls does not necessarily mean fraud is not occurring

• Policies excluded from new staff training or annual declarations

• No reporting of results


Best Practices

• Communication, communication, communication

• Disclosure of program and contact details to external stakeholders

• Periodic reminders of the program or signoffs for employees

• Consider use of independent champion to spearhead communications and reminders

• Consistent reporting of results or statistics and publicizing success stories


Developing the Corporate Culture• Tone from the top is crucial

• Actions speak louder than words

• Transparency of reporting investigation outcomes to whistleblower, where possible

• Disclosure of program and contact details to external stakeholders

• Consider incentivizing employee vigilance


Summary of key messages• Tips are the most frequent method of fraud detection

• The impact of fraud is significantly reduced if organization has a whistleblower line

• Protect whistleblowers

• Communication is critical

© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 22

Questions?

Paul [email protected]

Jason [email protected]

© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

kpmg.ca

© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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