Preventing Construction Industry Fraud with Internal Controls

Implementing and maintaining effective internal controls is one of the best actions a company can take to prevent fraud. The Association of Certified Fraud Examiners recently released its 2016 Global Fraud Study which analyzed occupational fraud cases worldwide. The cases studied in the construction industry had a median loss of $259,000, a 6% increase from 2014.

The most prominent weaknesses contributing to fraud were a lack of internal controls and an override of existing controls. Without effective controls, companies provide an opportunity for individuals to commit fraud. Opportunity, rationalization and pressure make up the three components of the fraud triangle. When all three elements come together, they create an optimal environment for risk.

The study noted areas with the highest risk of fraud as corruption, billing, expense reimbursements and non-cash items. Below are some internal control best practices that address the specific risks in the construction industry:

Corruption:

  • Continuously monitor for unusual employee behavior or unusual employee relationships
  • Implement a mandatory vacation policy
  • Recognize when an individual is living beyond their means

Billing:

  • Have a third party review line items and quantities on pay applications
  • Maintain an organized billing filing system
  • Segregate the duty of billing from processing customer payment
  • Maintain and monitor percentage of completion schedules

Expense Reimbursement:

  • Require approval of all expenses from an appropriate supervisor
  • Require original receipts be attached to expense report

Non-cash:

  • Use security cameras at job sites
  • Secure significant assets when not in use

Anders has assisted many of our clients improve their accounting and operational processes to protect against potential fraud risks.  For help assessing and improving your organization’s internal control environment, contact a trusted Anders advisor.