Contractors: Watch Out for Occupational Fraud

Nearly every type of business could be affected by occupational fraud, and construction businesses are certainly no exception. In fact, the Association of Certified Fraud Examiners (ACFE) reports that construction is among the industries with the highest median fraud losses. According to the ACFE’s most recent fraud survey — Occupational Fraud 2022: A Report to the Nations — construction ranked fourth, with a median loss of $203,000.

Only real estate, wholesale trade, and transportation and warehousing had higher median losses. Construction also had the second highest average loss at $2,868,000.

Knowing Where To Look

Obviously, it’s tough to stop fraud unless you know where to look. According to the ACFE report, the most common occupational fraud schemes in the construction industry were:

• • Corruption, such as bribery or conflicts of interest (56% of cases),
  • Billing schemes, where an employee submits invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases (24% of cases),
  • Noncash misappropriation, where an employee steals or misuses noncash assets, such as inventory, equipment or confidential customer information (24% of cases), and
  • Payroll schemes, where an employee makes false claims for compensation; for example, by claiming overtime for hours not worked or adding ghost employees to the payroll (24% of cases).

As you peruse that list, think about whether and how those crimes could strike your construction company. Do you believe you have adequate antifraud measures in place, or are there parts of your business vulnerable to wrongdoing?

Staying in Control

To prevent fraud, it’s critical to have a strong system of internal controls. Common examples of these include background checks, segregation of duties, dual authorization of sizable payments and management review of major processes. Per the ACFE report, nearly half of reported fraud cases occurred because of lack of internal controls (29%) or override of existing controls (20%). Another 16% were attributable to lack of management review. In addition, the ACFE’s survey found that several antifraud controls are particularly effective in detecting fraud early and minimizing losses. They include fraud hotlines (the most common way frauds are detected), job rotation/mandatory vacations, surprise audits, proactive data monitoring/analysis, antifraud policies, formal fraud risk assessments, fraud training, codes of conduct, and dedicated fraud departments or functions.

Minimizing Your Risk

Your construction company’s exposure to occupational fraud risks depends on its distinctive facts and circumstances. A good way to start fortifying your defenses is to conduct a formal risk assessment to pinpoint the areas where your business is most vulnerable. Don’t hesitate to contact us or ask your professional advisors, including your CPA, for help.