May be a good point to discuss private versus public works, other generalities about construction.
You’d be reviewing the audit trail between December through January, and you’d be looking for larger sums, or perhaps for smaller sums like this, that tend to repeat. But this is an example of the process you’d take when you are testing for suspicious transactions that are affecting the financial statement….
Asked- why would you want to overpay? Answer- you may be hiding personal work the sub performed, this may be money from one contract used to pay the sub for work done on another contract that has been purposely underpaid to prevent the client or lender from seeing an over-budget project, you may be paying for materials used on your owm home…
Questions I had at last presentation- difference between public and private works in terms of transparency/opportunity to defraud client; how did I respond to ORC fraudulent acts;
How did I respond to this assessment- took the view that this company is new and uninformed with regard to what constitutes fraud/what is illegal. Will I follow up with them?
Basic Risk Assessment checklists and guidelines are available on the ACFE website.
11/22/2012 Meeting - Fraud In The Construction Industry
P R E S E N T E D B Y :
R A C H E L V I L L I C A Ñ A , C F E
Construction Industry Fraud
Certified Fraud Examiner
LEED AP; Certified Associate Project Manager
6 years of Industry-Related Experience
President of Radii Consulting
Speaker at UCB 2012 Leadership Symposium:
MA- Forensic Psychology; UC Berkeley Alumna
I N D U S T R Y B A C K G R O U N D
C O M M O N F R A U D S C H E M E S I N T H E I N D U S T R Y
F R A U D R I S K S S P E C I F I C T O C O N S T R U C T I O N
F R A U D R I S K A S S E S S M E N T S
C A R E E R S I N T H E F I E L D
Construction Industry Statistics
Number of Employees:
(April 2012, US Census
Number of Employees:
*Based on 9.9% rate
Estimated Annual Fraud Loss in Industry
Based on the ACFE‟s 2012 Report to the
Nations, CFE‟s nationwide estimate a 5% annual loss
in revenue due to fraud.
5% of $1.731 Trillion: $86.55 Billion in potential
projected annual losses;
5% of $171.369 Billion: $8.57 Billion in potential
projected annual losses in California.
Timing Difference Scenario:
Harry Johnson of ABC
Builders altered the date of
transactions to adjust
financial statements to ABC‟s
Tax purposes- lower annual net profit.
Lending/Banking purposes- increase
assets; decrease liabilities.
Defective Pricing Scenario:
Georgia Sanders from 123
Construction submitted low
bids to obtain jobs.
She knew her company would lose
money if they performed these projects.
Expected to recover losses through
forced change orders.
Investigating the Scenario:
Original contract value was $1,000,000. Final costs
to client were billed at $1,500,000, with no
significant change of scope.
Review of correspondence with client to determine whether
change orders were approved.
Review of project costs- invoices from suppliers, field
labor, and overhead charges.
Review contractor‟s financial statements and current credit
situation, determine whether there‟s motivation to defraud the
Conduct interviews with field foremen- were these additional
costs due to significant changes in field conditions/availability
At UC Berkeley:
3 mechanical subcontractors have
blanket work authorizations
These subs are directly awarded jobs on
a rotational, yet bid-based cycle
Subs are known to engage in bid rotation
and suppression, since they are all
However, they want to maintain a
positive, long-term relationship with the
John Smith, owner of
Construction, Inc., anticipated a large
profit from a $1,500,000 contract.
He purchased materials with company
funds and sent two employees to
perform construction work on his home
during weekend hours.
The employees were directed to bill this
time to the contract mentioned above.
Financial Statement Fraud- Resources
Utilize in-house software reports
Ex. Quickbooks reports:
“Voided/Deleted Transactions Detail”
Audit tax returns
Personal returns of shareholders/officers
Review bank and credit card statements
Examine credit account applications
Compare printed copies of financial statement reports
Third Party Information- CPA, Enrolled Agents
Contract Fraud- Resources
Project file audits
Compare contract drafts
Research available correspondence
Third party information
Bid Rigging- Resources
Review bid documentation
Audit original project (bid) file
Gather related bids
Obtain bid results from public agencies.
Mitigate further losses
Recover some losses
Improve company relations
Involve law enforcement
Lessen corporate responsibility
Accountability for the blameworthy
Regain control of company
Fraud Risk Assessment- Case Study
Fraud Risk Assessment- Assessing whether fraud may be
occurring and what vulnerabilities do exist.
Case Study: Orange River Construction
Key Lockbox- client keys
Checkbook and Drawers
Employee Opportunities &
Identified Fraudulent Activities
Financial Statement Fraud
Skills Utilized Tools and Techniques
Assessing Orange River Construction
Orange River, Specific Examples
Employee Assessment- majority of employees are
unhappy at this company.
Management Assessment- President has history of
„burned bridges‟, unaccommodating personality.
Physical Controls- lack of security at shop.
Payroll Schemes- overtime not paid to particular
employees; ghost employees receiving health insurance.
Conflicts of Interest- President‟s landlord is company‟s
tenant and landlord‟s company is contractor‟s
Fraudulent Financial Statements- Timing Differences.
Signs of Contract Fraud- excessive proportion of clients
on payment plans due to overbudgets.
Know current and pending regulations.
Code of Ethics
Fraud Prevention and Detection Policies
Whistleblower Protection Policy
Social modeling- strong values of senior
Legal counsel, external advisors (including a CFE).
A) Regular and B) unplanned audits.
Work within the Industry:
Become a Project Risk Management Professional (PMI Certification)
Join a Large Company
Join a third-party service company:
Forensic accounting firm
Construction litigation firm, etc...
Or….Be Your Own Boss
Become an independent consultant:
Stronger credibility when defending against litigation or criminal
Higher degree of trustworthiness when banking and lending are
Few industry competitors.
Board positions on large companies
External advisor for small companies
Volunteer to Lead Workshops
Fraud Risk Awareness Trainings
One More Tip…
Offer (free) Fraud Risk Assessments!
A Fraud Risk Assessment can reveal multiple areas of
vulnerability in a construction company.
Offering an Assessment can lead to obtaining a contract to
provide risk mitigation services.
These services allow you to better network within the industry:
Provide great service to a general contractor- you may obtain
access to its industry network of clients, suppliers, and
Fraud Examiners Manual- 2011 edition: www.ACFE.com
Managing the Business Risk of Fraud:
Sample Fraud Risk Assessment from ACFE website:
California Infrastructure Projects-
A Guide to Successful Contracting and Dispute Resolution:
Bid Rigging (from California Contractor magazine):