Construction Accounting Article -
No Construction Company is Safe
Fraud Continues to Impede Projects, Threaten Profits

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Target Audience: Construction Industry Professionals, Contractors, Construction Business Owners, Forensic Accounting Services Interest, Construction Management, Victims of Fraud, Construction Companies Subject to Fraudulant Risk, Fraud Deterrence Programs Interest

Compared to the risks construction companies face every day on their jobs, fraud may seem a relatively small danger. It isn’t. Construction companies that are victims of fraud experience a median loss of $330,000, according to the Association of Certified Fraud Examiners (ACFE).

In its 2008 Report to the Nation, the ACFE noted that, though the construction industry reports fewer cases of fraud than many other industries, the losses per occurrence are fifth highest among industries surveyed. In other words, even a single incident of fraud could undermine all (or much) of your hard work over the past year.

3 “Hot” Frauds to Watch For

So what types of fraud are hot right now? Three in particular to watch for are:

1. Scrap metal scams. Scrap metal is a valuable commodity, especially during periods of economic uncertainty. You may keep a close watch on what leaves your job sites, but do you watch what comes in?

Acting in collusion with an accomplice in the scrap or junkyard business, an unscrupulous employee can order more metal (copper is particularly in demand) than you need, hide the cost in job reports and sell the excess to the accomplice for cash.

To prevent this type of fraud, make sure no one person is responsible for both ordering materials and approving their costs. Additionally, someone other than the person who orders materials should check them in when they arrive at job sites.

2. Misbegotten mechanics. Another fraud that requires collaborative effort is that of false equipment repairs. In this scam, an outside mechanic submits phony maintenance and repair invoices. An employee then approves them and splits the resultant payment with the mechanic.

Again, oversight is the key to preventing such schemes. Someone other than the employee who approves maintenance costs should review invoices. If a cost seems off-base, the reviewer should check with equipment operators to see when — or whether — the work was done.

3. “Dead” vendors. In this scam, someone sends you invoices bearing the logo and letterhead of a company that’s closing because the owner has very recently died or retired or the company is no longer operating. Before you’re aware the company is “dead,” you’ve paid the bogus charges and the fraudster is off to another scam.

To prevent this one, pay close attention to the invoices that come in, and make sure you’re paying for something you actually ordered.

Proactive Measures to protect against fraud

In addition to these frauds, construction companies are subject to the same billing, payroll, vendor and customer frauds that all businesses must guard against. To protect yourself, be proactive.

Establish internal controls that make it difficult for fraudsters to succeed, and adopt a “zero-tolerance” policy toward any type of unethical behavior. Make background checks a routine part of your hiring procedures, and incorporate the basics of fraud deterrence in your employee training programs. (Your Construction Accountant or CPA Firm can coach you on exactly what these basics are.)

The ACFE has also reported that tips are the most common way frauds are discovered. So invest in a forensic accounting firm and make sure all workers know their responsibility in reporting suspicious behavior.

Beyond that, work with your site supervisors, financial advisor and office administrators to identify and address weaknesses in your operations that could lead to fraud. If the same person who pays the bills also approves purchase orders and reconciles the accounts, for example, it would be easy for that person to write fraudulent checks undetected. Assign the job of reconciling the accounts to someone else, and fraud becomes much more difficult.

An Unwelcome Guest

Fraud is here to stay, but there’s no need for you to make it anything other than an unwelcome guest. Accepting that fraud can affect any business is the first step to preventing it. The second is putting safeguards in place to protect against it with the help of a forensic accounting services team.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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