The Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse (the Report) 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. Improper billing accounted for approximately 36% of construction fraud according to the Report. Fraud from improper billings could happen in many ways including the billings between a project manager and subcontractor or invoices being paid to a fictitious company.
If there is fraud related to improper billings, there is a good chance it’s the result of collusion between the subcontractor and project manager (or another employee who deals directly with the subcontractors). A subcontractor might approach the project manager about receiving kickbacks because that subcontractor wants the work. Have you thought about why a project manager might accept kickbacks from the subcontractor? Are they having financial difficulty at home or trying to maintain a certain lifestyle? The kickbacks could be cash or non-cash items such as extra concrete that’s being delivered to the project manager’s house to complete his drive-way. It’s important for a company to ensure there is a third party reviewing invoices or change orders and budget to actual project cost reports to prevent or detect fraud.
A proper vendor verification process is important to prevent payments to fictitious entities from occurring. Often, payments to fictitious entities are usually for professional or consulting services. It’s generally more difficult to measure the tangible benefits of these types of services to a project and therefore, these payments might not be questioned.
The best way to mitigate the effects of fraud is to investigate the suspected fraud immediately. Strong internal controls can give a company a fighting chance of detecting and preventing fraud.
Do you suspect fraud is occurring in your company? Have questions about your internal control environment? Anders can help investigate suspected fraud and improve your control environment through an internal control risk assessment.
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