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Since the pandemic began, construction companies have been forced to deal with project delays, cancellations, supply chain issues impacting raw materials and supplies, new safety measures on job sites, and other workforce issues. These challenges certainly impacted cash flow and profitability. For this reason, it is difficult to imagine that fraud could be occurring at a time when most companies struggling. Unfortunately, the sad reality is that even during the pandemic, fraud schemes were being perpetrated. According to the 2020 ACFE Report to the Nations, construction companies suffered a median loss of $200,000 per incident. Unfortunately, this places the industry amongst the top five highest fraud loss industries. To help companies understand the risk, common schemes, and effectiveness of prevention measures, JLK Rosenberger has provided a summary of the key information below.
Key Report Findings
- Frequent Fraud Schemes – The report investigated the most frequent fraud schemes perpetrated against construction companies. It was found that 47% of the cases involved corruption, 25% financial statement fraud, 22% billing fraud, 17% check and payment tampering, 13% cash larceny, 13% skimming, 12% cash on hand, and 9% expense reimbursements. This information provides important details companies need to consider when designing fraud prevention controls.
- Fraud Controls Impact on Median Loss – The report wanted to understand the relationship between anti-fraud controls and median-loss impact. It was found that job rotation/mandatory vacations resulted in a 50% loss reduction, internal audit department 50% reduction, management certification of financial statements 50% reduction, surprise audits 46% reduction, proactive data monitoring 38% reduction, hotline 33% reduction, fraud training 33% reduction, rewards for whistleblowers 21% reduction and employee support programs resulted in a 25% loss reduction.
- Common Schemes in High-Risk Departments – The report wanted to understand the most common schemes in certain departments such as operations, accounting, and customer service. The findings include:
- Operations – The most common schemes used against the operations department include corruption, billing fraud, noncash, cash larceny, and skimming.
- Accounting – The most common schemes used against the accounting department include billing fraud, check and payment tampering, corruption, payroll fraud, skimming, and cash larceny.
- Customer Service – The most common schemes used against the customer service department includes corruption, skimming, cash on hand, cash larceny, check and payment tampering, and expense reimbursements.
- Red Flag Behaviors – While the data on fraud schemes is useful, a comprehensive fraud prevention program also evaluates behavioral red flags as a proactive step. It was found that in 42% of cases, the fraudster was living beyond their means, 26% experiencing financial difficulties, 19% had an unusually close relationship with a customer/vendor, 15% control issues, 12% divorce/family problems, 9% addiction issues, 8% complained about inadequate pay, and 5% had past legal problems.
- Common HR Issues – The report also investigated the most common HR issues experienced by fraudsters. It was discovered in 13% percent of cases, a poor performance evaluation had been received, 12% fear of job loss, 10% denied raise or promotion, 4% cut in pay or benefits, and 3% had received a demotion.
- Punishments for Fraud – How a fraudster is punished sets the example for how the business may deal with other criminal behavior. It was discovered that in 66% of cases, the perpetrator was terminated, 11% no longer with the company, 11% reached a settlement agreement, 10% permitted to resign, 9% placed on probation, and only 5% received no punishment at all.
We’re here to help
Fraud is an ever-present threat that Los Angeles and Orange County construction companies need to address through fraud prevention planning. If you have a question about the report findings or need assistance with forensic accounting or fraud prevention planning, JLK Rosenberger can help. For additional information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon