SC&RA COMMENT: Avoiding fraud

By Joel Dandrea01 October 2019

Don’t end up on the wrong side of a racket.

While the construction industry isn’t necessarily at the top of the list for businesses affected by fraudulent acts, it certainly isn’t untouched. Industry experts analyzing the numbers connected to fraud by employees and subcontractors point out that over five percent of annual industry revenue is lost to fraud. U.S. construction brings in collective annual revenues of over a trillion dollars; five percent of a trillion or more is colossal.

Joel Dandrea 

A lot of the fraud associated with construction comes via corruption, which damages a company and its affiliates, and often ends up as attractive headlines for media platforms – which can add further damage to your brand. After that: billing and/or accounts-payable-related scams. Between the three, they comprise around 80 percent of construction fraud cases.

What can we do to prevent it – or at least get in the way of it? The Association of Certified Fraud Examiners (ACFE) lists red flags to look out for to identify folks (employees) who might be involved in scams: They have personal or business-related financial difficulties; they exhibit an unusually close relationship with a subcontractor or vendor; they display an unwillingness to share duties and insist on maintaining a great deal of control; and they practice a “wheeler dealer” approach to negotiating and making deals.

Oddly enough, ACFE also reveals that nearly 90 percent of those who engage in fraud have no prior record. Why? Because employers are often hesitant to bring charges for fear of publicity. Also, pursuing those charges and recovering stolen funds/information/equipment can be expensive.

Moreover, red flags can be raised in situations where: an unsuccessful bidder is doing contract work; the same firm is winning bids for one project after another; excessive change orders are submitted; there is a lack of competition in the bidding process; and poor workmanship requires rework.

ACFE also indicates that the majority of occupational frauds across multiple industries are committed by staff at the employee or managerial level, most often in accounting, operations, sales and executive or upper management. Not surprisingly, the higher the fraudster’s authority level, the greater the losses. Overall, more than half were with their firms for more than five years. Ultimately, billing and corruption schemes ranked among the three most common forms of fraud. In construction, these schemes can take a number of forms: corruption, bidding and billing.

Early detection

The benefits of various fraud prevention efforts and early detection are clear: Proactive methods (such as reviewing a contractor’s financial capabilities and pricing) result in earlier detection and lower median losses than more passive methods (such as tips, notification by law enforcement or external audits) can achieve. Consider these early detection practices:

Establish and enforce controls: Controls include surveillance and monitoring, internal audits and management reviews. Utilize an evaluation committee with objective members for the bidding process. Segregate duties when handling sensitive information. Enforce an anti-fraud culture with training, support and consequences if needed.

Define work costs: Within the contract, include a provision that defines all costs compensated for by the owner, including what is allowable and what is not.

Identify insurance costs: You should clearly understand what is being charged and why. It’s a complicated issue – and both parties can find themselves overpaying.

Audit throughout: Make sure all negotiated costs and contracts include a right-to-audit clause (external and internal). Internal audits should be conducted by either experienced internal audit staff or outsourced auditors with experience in construction audits.

Utilize technology: Modern fraud-detection software tools like Viewpoint, Textura, TradeTapp, Assemble and PlanGrid provide extra layers of internal systems protection that will ultimately save you time, money and, perhaps, reputation if you find yourself on the wrong side of a racket.

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