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February 19, 2013

Construction Industry Best Practices in Internal Controls

Fraud in the construction industry reports the 3rd highest median losses per case compared to other industries.  Why do people commit fraud? Motivation. Opportunity. Rationalization.  The construction industry was hit hard by the current economic crisis causing companies to lay off workers, decrease pay, or even shut their doors for good.  This puts a financial strain on people working in the industry and gives them the motivation and rationalization to commit fraud.  Now all they need is the opportunity!  Prevent your company from giving it to them by ensuring strong internal controls are in place. Items can be stolen from the jobsite and sold for extra cash.  Project managers could be receiving kickbacks from vendors.  The Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse reported the top five fraud schemes in the construction industry were from billing (36.2%), corruption (34.0%), check tampering (21.3%), non-cash (21.3%), and payroll (19.1%).  There are many opportunities for fraud to be committed but proper internal controls can help to mitigate some of the risk.  Below are some best practices in internal control for construction companies.

Cash Controls

  • Proper approval of invoices
  • Dual signatures on checks
  • Only certain personnel are authorized to sign checks
  • The individual who signs checks is not allowed to generate checks
  • Use of a lock box for customer payments
  • The individual billing customers isn’t allowed to receive or record customer payments
  • Use of a positive pay verification system at your bank

Subcontractor and Supplier Controls

  • Payments should be compared to original contract amounts
  • Original contract costs should be compared to revised contract costs on a monthly basis
  • Monitor subcontractor/supplier bidding process

Jobsite Controls

  • Use of security cameras
  • Comparison of purchased material quantities to original estimates

Payroll Controls

  • Report jobsite labor daily using an electronic sign-in/out system
  • Use of direct deposit
  • Reconciliation of the payroll bank account by someone outside of the payroll department
  • Surprise jobsite visit on payday to verify employees receiving payroll checks are not fictitious

Strong internal controls can give a company a better chance of detecting and preventing fraud.  Have questions about your internal control environment?  Contact an Anders advisor for help improving your control environment through an internal control risk assessment.

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