Fraud in the Construction Industry

The Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse reported only 3.4% of the fraud cases covered by the report were in the construction industry.  Good news, right?  Not necessarily, the median loss per case was $300,000, which is the third highest of all industries.  Of the cases in the construction industry, the top five fraud schemes were from billing (36.2%), corruption (34.0%), check tampering (21.3%), non-cash (21.3%), and payroll (19.1%).  In all industries, asset misappropriation was the most widespread form of fraud at 87% but had the lowest median loss of $120,000.  Although, financial statement fraud occurred in only 8% of the fraud cases, it had the highest median loss at $1 million.

Why do people commit fraud? Motivation. Opportunity. Rationalization.  Generally, the fraudster exhibits behavioral red flags regardless of their position in the company, with the most prevalent being living beyond their means and having financial difficulties.  While most fraud occurs at the employee or manger level (43% in the U.S.), the highest median loss comes from fraud committed by owners/executives ($373,000 in the U.S.).  Over 80% of fraud cases covered by the report occur by employees who have no criminal background or an objectionable employment history.  The majority of fraud cases occurred with employees between the ages of 30-50, had been with the company for 1-5 years, and has a bachelor degree.  But it’s no surprise the highest losses come from employees between the ages of 51-55, more than 10 years experience, and have a postgraduate degree.

The 2012 Report to the Nations noted the most common internal control weakness in cases of fraud was … a lack of internal controls.  Stay tuned to the Anders blog for best practices in internal controls in the construction industry.