Guest CommentaryPreventing Construction FraudThe construction industry is especially susceptible to fraud because of the complexity of project finances,multi-tiered entities—such as subcontracting—and the large number, variety and cost of materialsBy Marion A. HechtL ike the national debt, dollar amounts invoices: Payments may be attributed to fraud and corruption are “Construction executives authorized and sent to a post- staggering. According to the 2010 “Re- should carefully consider office box or fake address.port to the Nations on Occupational Fraud “Ghost employees”: Pay-and Abuse” by the Association of Certified the possible sources of roll may include extra hoursFraud Examiners and based on a survey of fraud.” not worked or hours for aits members, global fraud loss is estimated to — marion a. heCht non-existent employee.be more than $2.9 trillion annually. Managing Director Vehicle and equipment While incredulity and outrage may greet maintenance: Without prop-such excess, the best response is action— er systems in place, a servicenamely, fraud prevention at the local level.What should a construction executive look consider carefully the possible sources of provider may unknowingly receive payment fraud. from a construction company for work donefor when it comes to such an enormousproblem? Plenty. The construction industry is especially on a non-business vehicle or parts may be Facts about fraud cited in the 2010 report susceptible to fraud because of the com- ordered for non-business reasons.include survey results from ACFE members: plexity of project finances, multi-tiered Off-site work: Services performed at an • Organizations lose an average of 5% in entities, subcontracting, large amounts of unauthorized site may include a change annual revenue to fraud. public and private funding with complicat- order created to falsely identify the cost as ed documentation, expensive equipment, project related. • Misappropriation schemes are the most and the large number, variety and cost of Bid collusion: Multiple contractors or common form of fraud. materials, among other opportunities for il- subcontractors may agree which company • Occupational fraud is most likely to legal activity. will be awarded a job and at what price. be detected by tips, a finding that has The schemes outlined below are exam- been consistent since the ACFE began Kickbacks: Payments made “under the ples that range from actions committed by tracking data in 2002. table” for favoritism or special deals result one person to more complex activities that in higher costs for the legitimate company. • Small organizations are more likely to involve two or more people. be victimized by fraud. Tool theft: Hand tools may disappear A company’s leadership determines that • Individuals at higher levels of an orga- from jobsites and be reported as lost. These company’s vulnerability to fraud. A robust nization cause the most harm. tools may be taken by employees for their prevention and detection program is a must. • Executive-level fraud takes longer to personal use and potentially their own small Strong internal controls, integrity, back- detect. businesses if they moonlight on the side. ground checks, codes of ethics, training, tip • A fraud may last an average of 18 Materials waste: Excessive materials as lines and internal surprise audits—among months before being detected. well as non-project materials may be or- other company-specific risk strategies—can • Eighty-five percent of perpetrators dered and diverted for personal use and ulti- mitigate the conditions that allow for the oc- are not associated with known prior mately reported as stolen. currence of fraud by employees, suppliers or offenses. Product substitution: An inferior grade subcontractors as well as secure jobsites and of a material may be ordered if purchase or- equipment. n • Most fraud is committed by people in accounting, operations, sales, execu- ders are not matched to receipts. Marion A. Hecht is managing director of the Valua- tive management, customer service or Duplicate payments: Two checks may tion and Forensic Services practice in the Arlington, purchasing. Va., office of Clifton Gunderson LLP. She has more be written to the same payee, and the fraud- than 20 years of experience investigating fraud and ster may decide to endorse the second check transactions involving shell companies, multi-tieredConstruction-Specific Fraud over to himself or to a third party. The payee organizations and alter-ego entities.Difficult economic times often provide a of the second check is recorded in the gener-backdrop for illegal activity. The downturn The Association of Certified Fraud Examiners’ 2010 al ledger but is not the actual recipient of the “Report to the Nations on Occupational Fraud andin the economy affects many industries, check. Alternatively, two payments may be Abuse” can be found at www.acfe.com.and it seems to have a significant impact on received by the vendor on the same invoice.the construction industry in particular. Itis important for construction executives to Fictitious vendors and shell-company January/February 2012 Constructor 59
Construction Fraud, Corporate Corruption, Jobsite Theft, Work Fraud, Fraud Losses
The construction industry is especially susceptible to fraud because of its inherent complexity.