Standing in the Way of Construction Fraud
- Larry May
Typically, when one thinks of fraud, they think of the accounting or banking industry. Many are surprised to realize how widespread fraud really is, affecting countless other industries and professions. That’s why it is no surprise that the construction industry is often faced with fraud.
Fraud can be defined in several ways, including as a deception deliberately practiced to secure unfair or unlawful gain, or an intentional representation an individual knows to be false or does not believe to be accurate, knowing that the representation could result in some unauthorized benefit to themselves or some other person.
Global fraud is widespread, with the average length of a fraud scheme going on for 16 months before it is ever discovered. The median annual loss for construction companies due to fraud is over a quarter million dollars.
Corruption is the most common scheme in almost every global region, with the conduct by those in power (typically involving bribery) at the top of the list. Types of corruption include conflicts of interest, illegal gratuities, economic extortion, bribery (including kickbacks and bid rigging), and illegally enrolled in programs.
Asset Misappropriation is an area of fraud that sees theft of cash on hand or cash receipts, known as skimming, fraudulent disbursements, which includes billing and payroll schemes, and the misuse of inventory and other assets.
Financial Statement Fraud is also prevalent in the industry, with fraudsters utilizing timing differences, fictitious revenues, concealed liabilities and expenses, and improper disclosures to facilitate their schemes
Fictitious Vendor is a common type of fraud where invoices are paid to a fictitious vendor. The embezzler establishes a fake vendor and enters it into the Company records as legitimate, produces invoices for the fake vendor, and submits them for payment. Frequently, the embezzler has the authority to approve the invoices for payment.
Ghost Employees are a type of fraud where the embezzler enters fictitious employees into the payroll system and receives the resulting payroll checks. A variation of this is keeping terminated employees on the payroll after they have left their jobs.
Company Check Fraud can involve check tampering schemes where the embezzler uses company checks to pay personal expenses, including similar personal bills, such as their phone, utility, or credit card bills, or outgoing checks are stolen.
Misuse of Company Equipment is a fraudulent scheme that involves using company equipment, labor, or materials to perform jobs on the side, with employees pocketing the money from the side jobs. Additionally, employees may use a company gas card to provide gas to other individuals and receive cash payments.
Payroll Schemes can occur when an employee has the right to change payroll records and create payroll checks. Sometimes the gross payroll is increased, and the tax deductions for federal and state withholding are inflated. However, the net paycheck still appears reasonable, resulting in the embezzler receiving larger than normal income tax refunds.
Small businesses are particularly vulnerable and at risk when it comes to fraud, as they typically have fewer resources than their larger counterparts. This lack of on-hand resources often translates to fewer and less-effective anti-fraud controls, resulting in their losses having a more significant impact than they would in larger organizations.
While not all fraud is easily detected, there are specific steps in place companies can take to try and limit their losses.
Remarkably, six behavioral red flags have consistently been the most common when recognizing the behaviors of a typical fraudster, including:
Becoming familiar with these red flags could help prevent you or your organization from becoming a target.
Detecting fraud requires not only good intuition but having someone in your corner you can trust. Contact your CRI advisor, who can provide the external eyes your organization needs to catch and prevent fraud before it becomes a problem and costs you hard-earned income.
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