On average, a single incident of fraud cost $441,000 in the manufacturing sector, according to the Association of Certified Fraud Examiners' 2008 Report to the Nation on Occupational Fraud and Abuse. That's higher than the financial services industry and the highest of any sector with high incidence of fraud.
With today's economic climate hurting many manufacturers, it's more important than ever that companies take aggressive measures to prevent fraud that costs organizations an estimated seven percent of their annual revenue.
To mitigate fraud, Deloitte recommends that companies set a positive, anti-fraud tone at the top and maintain an effective whistleblower hotline that is accessible and confidential.
Cummins Inc., an international power equipment manufacturer based in Indiana, recognizes the role that company culture plays in detecting and preventing the risks of fraud.
Given the high value of the products and the raw materials used, risk management is a major overarching priority, not a one-department job. Cummins operates in about 160 countries, manufacturing diesel engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems.
To ensure that the Code of Conduct policies were being enforced consistently across the organization, Cummins has developed a comprehensive strategy to keep employee misconduct and compliance costs at a minimum.
A Proactive Approach to Managing Risk
Long before Sarbanes-Oxley mandated anonymous whistleblower programs in public companies, Cummins recognized that a reporting mechanism could provide a view into what is going on around the world through the eyes of its nearly 40,000 employees. Cummins wanted to make sure they could report anything that goes against company policies.
Taking a Six Sigma approach, Cummins deployed a company-wide anonymous reporting mechanism and case management system to report, manage and resolve incidents that may expose the company to fraud or compliance risk. They selected a third-party vendor, EthicsPoint, to provide a trusted, safe resource for employees to report issues and, if necessary, remain completely anonymous.
The reporting process is precise. Today, when a Cummins employee reports any action that is inconsistent with the code of conduct, the individual is directed to a specific set of questions that makes sure the company gets the information necessary to resolve the incident. These details include where the incident took place, at what time, which items were involved and whether particular individuals were involved. Reporters can also upload documents, name witnesses and provide any other details that can help Cummins recuperate losses and understand how to prevent similar events from happening.
Giving Every Case a Consistent Review
The whistleblower report intake service is integrated with a comprehensive incident management system, which is a critical component to the risk management efforts at Cummins. On an organizational level, this centralized system allows multiple departments to work collaboratively using a consistent methodology. Users are granted different levels of access based on their department and role.
Once the report is submitted, an automatic notification is sent to the appropriate departments, based on the nature of the report. The relevant teams, which may include security, internal audit, legal and human resources representatives, work together to investigate the incident. Throughout the investigation, a Master Investigator can assign tasks and track the case to resolution. The company recognizes the value of sharing an integrated incident management system -- managing one system is much more efficient and effective than managing four.
Case histories, notes and documentation stored in the centralized database give investigators information to help guide their cases. A member of the legal department, for example, could find out whether an employee has been implicated in a particular type of issue before, which disciplinary actions were taken with similar issues, and how the employee was treated. New investigators can be easily added to the case and familiarize themselves with what steps have been taken toward the resolution of the issue.
By searching for similar cases that have taken place in the past, investigators can make sure the investigation process and code of conduct enforcement methodologies are consistent around the world. Additionally, the comprehensive nature of the incident management system helps Cummins conduct a detailed analysis of the company by business unit and by region. This oversight helps the company better identify trends and areas of risk for the organization.
Making Ethics Everyone's Business
At Cummins, ethics and compliance aren't just the responsibility of a few people in HR -- they involve all our employees. With a comprehensive and consistent system in place across its global operations, Cummins has reinforced its company culture and code of conduct. Employees recognize that people at every level of the organization are held equally accountable to the Code of Conduct.
Cummins has actively empowered employees in bringing to light misconduct and fraud that degrade the company's culture of integrity, and this strategy has been very effective at increasing their willingness to communicate Code of Conduct violations. Employee confidence is measured by whether they identify themselves in reports. During the last 2 years, the percent of reporters who felt confident enough to self-identify has risen from 50% to 65%.
With employee fraud predicted to rise this year and heightened pressures to minimize operational costs, manufacturers can no longer absorb the losses from theft and fraud. It's time to enlist your most valuable resource -- your employees -- in the fight against fraud.
Sondra Bolte is the HR director - Global Ethics Investigations at Cummins. She has spent the last 10 of her 28 years at Cummins working on the continuous task of fostering an ethical culture in each of the 160 countries where Cummins operates. Cummins Inc. is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. www.cummins.com