Construction ranks among the top five industries with the highest median losses from fraud, says the Association of Certified Fraud Examiners (ACFE). The organization’s “Occupational Fraud 2022: A Report to the Nations,” reviewed 2,110 of the largest occupational fraud cases investigated in 2020 and 2021 across 133 countries and 23 industries.
Occupational fraud generally refers to the type of fraud committed by employees. It’s arguably the most common and most costly financial crime affecting companies around the world. Below are a few key takeaways for construction company owners from the report.
Fraud in the industry
Among the most common fraud cases found in construction, more than half were the result of corruption (56%). This is when an executive or employee influences a business transaction to gain direct or indirect benefits. Such schemes can include bribery and conflicts of interest.
Billing, payroll and “noncash” schemes each accounted for approximately one-quarter of construction fraud cases (24%). Billing schemes can include invoices for fictitious goods or services not rendered, invoices with inflated prices, or invoices submitted for personal expenses.
Payroll schemes include payments issued for false claims of compensation (such as overtime hours not worked) or to nonexistent “ghost” employees. Noncash misappropriations refer to stolen or misused equipment, inventory and even confidential customer information.
Other types of fraud included cash-on-hand misappropriations or cash larceny (18%), manipulated financial statements (18%) and expense reimbursements (17%), and check and payment tampering (14%). The lowest instances of occupational fraud in construction were skimming (9%) and register disbursements; that is, false entries made on a cash register to conceal fraudulent removal of cash (3%).
Antifraud measures
According to the ACFE report, nearly half of fraud cases occurred because the organization either lacked internal antifraud controls (29%) or had controls in place that were overridden (20%). Fraud losses were two times higher at companies without a fraud-reporting tip hotline.
The study found that job rotation/mandatory vacation policies and surprise audits of financial statements can cut losses by half — yet those two antifraud controls were the least common strategies implemented across the organizations. Other measures that quicken fraud detection and prevent losses include proactive data monitoring and analysis, as well as formal fraud risk assessments.
Warning signs
The following behaviors or circumstances were identified as red flags that an employee might be committing fraud:
- Living beyond one’s means,
- Financial difficulties,
- Unusually close associations with vendors or customers,
- Control issues, such as an unwillingness to share job duties,
- Irritability, suspiciousness or defensiveness,
- Use of bullying or intimidation tactics,
- Divorce or family problems, and
- A “wheeler-dealer” attitude.
In addition to implementing the antifraud measures already mentioned, if you haven’t already, carefully review monthly financials for signs of trouble. Also, delegate job responsibilities directly related to money — such as accounts receivable, accounts payable and payroll — to more than one employee so no one has complete control over them.
Catch it early
Motivation to commit occupational fraud has increased since the start of the COVID-19 pandemic. And smaller construction companies are as much at risk as larger ones. Early detection is critical. According to the ACFE report, most occupational fraud schemes typically last at least a year before they’re uncovered.
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