In no other industry is fraud more prominent than in the construction industry. In fact, data from a recent fraud study released by the Association of Certified Fraud Examiners (ACFE), makes this point. According to the report, the median fraud loss among construction firms in the study was $245,000, nearly twice the rates for companies in other industries.
Managers can be effective at preventing internal fraud by keeping their eyes open during routine reviews of the financials. If you notice changes that aren’t familiar or routine, it could be a trigger to dig deeper. Making these discoveries is never pleasant and it often leaves management with a bitter taste and a feeling of betrayal. After all, even suspecting that someone would take from the company, let alone confirming it, represents a deep breach of trust.
There are several types of fraud schemes commonly run. Below we have provided a summary list of the most common types. Through some insight into how these fraudsters operate, management and others will know what red flags to look for in their financial reporting and operations. These include:
1. Check tampering this includes financial employees writing checks to themselves and entering them in the system as checks made out to other vendors.
2. Expense reimbursements a common tactic where employees submit false expenses for transactions that never occurred and then write themselves reimbursement checks.
3. Billing with this scheme, financial employees set up fake accounts for fictitious vendors. They then issue payments to them for non-existent goods and services and cash the checks themselves.
4. Fraudulent Use of Credit Cards often employees use their company issued credit cards to make personal purchases such as gas for their personal vehicle or to buy tools and other supplies for their personal collection. The key is they purchase small ticket items that appearto be legitimate but are not.
Steps to Prevent Fraud
There are a number of steps that can be taken to reduce fraud exposure. The most important is to ensure there is an effective set of internal controls in place designed to more quickly uncover and thereby deter employees from engaging in this behavior. Below, is a list of the key prevention measures which will go a long way in helping to reduce the opportunity for fraud, including:
Segregating financial duties. Make sure that one employee is not responsible for handling every step in a financial transaction. More than one set of eyes makes it much more difficult to steal. Comparing cash receipts to accounts receivable on a monthly basis.
Comparing job cost estimates with the actual job costs after jobs are complete. This will help you to identify cost overruns and uncover inappropriate purchases if they have occurred. Reconciling actual billings with general ledgers on a monthly basis.
For additional information, please contact us at 559-431-8334. We look forward to speaking with you soon.
By Frank Hambalek, CPA
Partner at WHH
Frank specializes in high-level consulting and financial reporting work with medium- to large-sized construction and real estate companies. With his talent in managing systems and people, he has served as an outsourced CFO for many clients. Other specialties include internal fraud prevention, GAAP standards, and the new leasing standards.