By Deepa Bhat, CPA, CFE, ACA, Principal
ASL Construction Group
The COVID-19 pandemic created challenging circumstances for many Bay Area construction contractors. The combination of government orders and fear of virus transmission led to the delay or cancellation of many scheduled projects. And unfortunately, even prior to the COVID-19 pandemic, construction companies were dealing with another challenging situation, employees and vendors perpetrating fraud schemes against the company. According to the ACFE 2020 Report to the Nations, the median fraud-related loss experienced by construction companies was $200,000 per incident (based on investigations that occurred between January 2018 and September 2019). This means, construction is in the top six of the highest median loss experienced, behind mining at $475,000; energy at $275,000; real estate at $254,000; telecommunications at $250,000; and health care also at $200,000. This unfavorable ranking reflects the need for construction companies to do more to prevent and detect fraud schemes to limit losses.
About the Report
The report was generated from a survey completed by Certified Fraud Examiners globally between July and September 2019. Participants were presented with 77 questions regarding details of the fraud case including information about the perpetrator, victim organization, methods of fraud employed, and trends in general.
Key Report Findings
- Construction Fraud Schemes – Given the high amount of loss per case, the report wanted to understand the common fraud schemes perpetrated against industry companies. It was determined that in construction cases, the following occupational fraud schemes were the most common:
- 47% – corruption
- 25% – financial statement fraud
- 22% – billing fraud
- 17% – check and payment tampering
- 13% – cash larceny
- 13% – payroll fraud
- 9% – expense reimbursement fraud
Given the high incidence of corruption, it is important for construction companies to develop anti-fraud controls that specifically prevent these behaviors from occurring.
- Anti-Fraud Controls – There was also interest in identifying the most common anti-fraud controls in use at victim organizations. The survey asked respondents which of the following controls the victim organization had in place at the time of the fraud:
- 83% – external audit of financial statements
- 81% – code of conduct
- 74% – internal audit department
- 65% – management review
- 62% – independent audit committee
- 56% – anti-fraud policy
- 55% – employee fraud training
- 41% – formal fraud risk assessments
- 38% – proactive data monitoring
- 13% – whistleblower rewards
- Internal Control Weaknesses – There was also curiosity about the internal control weaknesses that contribute to fraud. Here’s the breakdown:
- 32% – lack internal controls
- 18% – override of existing internal controls
- 18% – lack of management review
- 10% – poor tone at the top
- 6% – lack of competent individuals in oversight roles
- 3% – lack of employee fraud education
- 2% – lacked clear lines of authority
It is important to regularly assess and address weaknesses to limit opportunities for fraudsters.
- Behavioral Red Flags – In addition to the fraud scheme used, the report also wanted to understand if there are behavioral red flags that are present when fraud is occurring. It was found that:
- 42% of cases, fraudsters were living beyond their means
- 26% were experiencing financial difficulties
- 15% had control issues
- 12% were experiencing divorce or other family problems
- 9% suffered addiction issues
- 7% refused to take vacations
- 5% had past legal problems
- 4% experienced instability in life circumstances
Although not a sure sign fraud is being committed, the confluence of several items may warrant additional attention.
- Other Types of Misconduct – Oftentimes, the fraudster will garner attention for misconduct concurrent to the commission of fraud. It was found that the following non-fraud misconducts are the most common among fraudsters:
- 20% – bullying or intimidation
- 13% – excessive absences
- 12% – excessive tardiness
- 8% – excessive web browsing
- 3% – sexual harassment
- 2% – visiting inappropriate websites
Contact Us
Unfortunately, fraud is an ever-present threat to the construction industry. It is important to constantly review and update your fraud prevention program to ensure the maximum amount of protection possible. If you have questions about the information outlined above or need assistance with a fraud issue, our Construction Group can help. For more details call us at 408-377-8700 or click here to contact us. We look forward to speaking with you soon.
Source: Report to the Nations® 2020 Global Study on Occupational Fraud and Abuse