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  • 1. Presented by:
    Andrew Kramer, CPA
    Fraud; A New Age of Risk for Contractors
  • 2. Forensic Accounting and Investigative Services
    Fraud prevention
    Internal control review
    Fraud awareness training
    Pre-employment background checks
    Fraud detection
    Fraud scheme detection
    Interviews and interrogation
    Fraud investigation
    Asset theft investigation
    Partnership malfeasance investigations
    Documentation of fraud occurrence
    Litigation support
  • 3. Trends in Fraud
    Economy and fraud have an indirect relationship.
    Increase in fraud occurrences since economic crisis began in 2008.
    Scheme with the greatest increase in occurrence:
    Theft of company property.
    Embezzlement and expense account fraud
    More fraud occurrences due to the economy will be found at a later date.
    Median duration of all fraud schemes is 18 months.
    Institute of Internal Auditors, “Knowledge Alert; Emerging Trends in Fraud Risks, 2010”
  • 4. Trends in Fraud
    Most frauds are uncovered by:
    Tips (40.2%)
    Management review (15.4%)
    Internal audit (13.9%)
    Small organizations (>100 employees):
    Suffer the greatest percentage of frauds.
    Median fraud scheme loss of $155,000.
    Most common schemes:
    Check tampering
    Association of Certified Fraud Examiners, “Report to the Nation, 2010”
  • 5. Fraud Trends in the Construction Industry
    Median fraud loss is $200,000
    Out of the construction cases polled:
    Corruption (45.5%)
    Use of influence that violates duty of due care to employer.
    Billing (29.9%)
    Payments are issued for fraudulent invoices of goods or services, invoices with inflated prices, personal expenses.
    Check tampering (18.2%)
    Checks are intercepted, forged, or altered.
    Association of Certified Fraud Examiners, “Report to the Nation, 2010”
  • 6. Fraud Trends in the Construction Industry
    Skimming (15.6%)
    Employee steals Cash from an organization before it is recorded in the accounting system.
    Non-cash Theft (15.6%)
    Employee steals or misuses non-cash assets of the organization.
    Expense Reimbursements (13.0%)
    Employee requests reimbursement for personal, fictitious, or inflated business expenses.
    Association of Certified Fraud Examiners, “Report to the Nation, 2010”
  • 7. Four Elements of Fraud
    Hidden (concealed)
    Intentional; violates the employee’s fiduciary duty to the company
    The perpetrator receives a benefit
    Costs the employing organization assets, revenue, etc.
  • 8. The Fraud Triangle
    Financial Pressure
  • 9. The Fraud Triangle; Pressure
    Causes an employee to commit fraud
    High amounts of debt
    Family medical costs
    Housing market pressures
    Bad investment decisions
    Addiction Problems
    Drugs, alcohol, gambling
    Lavish lifestyle
    Poor economy = greater pressure on employees
  • 10. The Fraud Triangle; Rationalization
    Means of justifying the fraudulent act.
    Low employee morale can result in a rationalization to commit fraud.
    Low employee morale is often linked to theft more often than low pay is linked to theft.
    “The boss can afford it.”
    “I’m not hurting anyone.”
    “I’ll pay this back.”
    “They owe me.”
    “No one will notice if this is gone.”
  • 11. The Fraud Triangle; Opportunity
    Ability for an employee to commit a fraud.
    Employee exploits job duties and responsibilities.
    Weak internal controls
    Poor oversight
    Abuse of decision making authority
    Opportunity is the factor most able to be changed by the organization.
  • 12. Fraud Prevention
    Eliminate Opportunity
    Increase the perception of detection
    People rarely commit fraud if they think they will be caught.
    Implement strong internal controls
  • 13. Increasing Perception of Detection
    “Tone at the Top”
    Managers need to communicate that they are serious about fraud detection and prevention
    Employee Education
    Internal controls for monitoring employees
    Company fraud (ethics) policy
  • 14. Increasing Perception of Detection
    Proactive policies
    Fraud assessment questioning
    Mandatory vacations
    Surprise audits
    Vigorously pursue dishonest acts
    Implement fraud hotline
    With hotline:
    Median Loss: $100,000
    Duration of fraud: 13 months
    Without hotline:
    Median Loss: $245,000
    Duration of fraud: 20 months
  • 15. Internal controls
    Segregation of duties:
    Recording (Record keeping)
    Custody of assets
    Proper procedures for authorization
    Adequate documents and records
    Physical control over assets and records
    Independent checks on performance
  • 16. Internal controls
    Develop policies and procedures
    Demand compliance by employees
    Enforce punishment for violations
    Complete pre-employment background investigations of employees
    Safeguard company assets
    Utilize employee dishonesty insurance
  • 17. Case Study 1
    Project Manager
    Victim Company
    Construction Company
    Fraud Scheme:
    False Invoices/Check Interception
    A. Spescia and “A.J. Splescian”
    Loss: $2.8 Million
  • 18. Case Study 2
    Victim Company
    Construction Company
    Fraud Scheme:
    Fraudulent Disbursements
    Loss: $333,103.30
  • 19. Case Example 3
    Divisional Merchandising Manager
    Victim Company
    Home Improvement Retailer
    Fraud Scheme
    Acceptance of Bribes
    No quote/bid requirements
    Loss: $2.5 Million
  • 20. What can you do NOW?
    Improve perception of detection:
    Implement a fraud policy.
    Decide what fraud is and the consequences of committing fraud.
    Communicate policy to employees.
    Employ a fraud hotline or anonymous reporting system.
    Check if insurance policy covers acts of employee dishonesty.
    If not, look into the cost/benefit of adding coverage.
  • 21. What can you do NOW?
    Implement internal controls:
    Segregation of duties: Cash receipts
    Separate cash handling and record keeping.
    Deposit receipts ASAP.
    Reconcile deposit slips to deposit receipts.
    Segregation of duties: Cash payments
    Separate authorization, custody, record keeping.
    Require a check to invoice review when manually signing checks.
    Review cancelled checks during bank reconciliation.
  • 22. What can you do NOW?
    Implement internal controls:
    Segregation of duties: Payroll
    Separate inputting information into system and running payroll.
    Periodic review of employee listing.
    Compare addresses to vendor listing.
    Look for non-current employees.
  • 23. Contact Information
    Andrew Kramer
    1850 North Central Ave, Suite 400.
    Phoenix, AZ 85004