The construction industry has made great strides in overcoming
the outdated perception that it's rife with corruption. Unfortunately, the fact
remains that contractors lose hundreds of thousands of dollars a year to
occupational fraud.
As formally defined by the Association of Certified Fraud
Examiners (ACFE), occupational fraud is: "The use of one's occupation for
personal enrichment through the deliberate misuse or misapplication of the
employing organization's resources or assets."
The ACFE's reporting on the prevalence of fraud is widely read
throughout the business world. Let's review what its latest report says about
the construction industry.
Target these vulnerabilities
In the ACFE's most recent fraud survey — Occupational Fraud 2024: A Report to
the Nations — construction ranks fourth in the "Top 5 median losses
by industry," with a median loss of $250,000. Only mining, wholesale trade and
manufacturing had higher median losses. The average loss per case across all
industries was $1,662,000.
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 (52% of cases),
- Billing
schemes, where an employee submits invoices for fictitious goods or
services, inflated invoices, or invoices for personal purchases (38% of
cases),
- Noncash
misappropriation, where an employee steals or misuses noncash assets, such
as inventory, equipment or confidential customer information (25% of
cases),
- Fraudulent
expense reimbursements, such as submitting fake receipts or presenting
documentation for the same expense more than once (25% of cases), and
- Payroll
schemes, where an employee makes false claims for compensation, such as
claiming overtime for hours not worked or adding ghost employees to the
payroll (23% of cases).
After reading those examples, consider whether and how those
crimes or others like them could strike your construction company. Do you have
adequate antifraud measures in place, or are there parts of your business
vulnerable to wrongdoing?
Rely on internal controls
A strong internal control system is critical to preventing
fraud. Common examples 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 either
a lack of internal controls (32%) or an override of existing controls (19%).
Another 18% were attributable to a lack of management review.
Historically, the ACFE has recommended a variety of antifraud
controls as particularly effective in detecting fraud early and minimizing
losses. These include:
- Fraud hotlines
(the most common detection method),
- Job rotation /
mandatory vacations,
- Surprise
audits,
- Proactive data
monitoring/analysis,
- Antifraud
policies,
- Formal fraud
risk assessments,
- Antifraud
training,
- Codes of
conduct, and
- Dedicated
fraud departments or functions.
Interestingly, in the 2024 ACFE report, web-based reports were
the common fraud-reporting mechanism, coming in at 40%. Email was next at 37%,
and good old-fashioned telephone hotlines came in last at 30%.
Stay vigilant
Every construction company's risk of occupational fraud differs
depending on its size, workforce and other factors. However, one thing's for
sure — no construction business is immune from this very significant threat. Be
sure to stay vigilant. We can help you assess your fraud risks, strengthen
internal controls and undertake other measures to prevent financial wrongdoing.