Reprinted with permission of The McGraw-Hill Cos. and AGC of America

1. Guest Commentary
Preventing Construction Fraud
The 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 materials
By Marion A. Hecht
L
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 hours
Fraud Examiners and based on a survey of fraud.” not worked or hours for a
its 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 service
namely, 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 done
for when it comes to such an enormous
problem? 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-tiered
Construction-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 and
in 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. It
is important for construction executives to Fictitious vendors and shell-company
January/February 2012 Constructor 59

2. Construction Fraud, Corporate Corruption, Jobsite Theft, Work Fraud, Fraud Losses

4. The construction industry is especially susceptible to fraud because of its inherent complexity.

6. Guest Commentary