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When running a construction business the last thing a manager or business owners expects to learn about is fraud occurring in their company. It’s upsetting that a trusted employee(s) would behave in such a way, but unfortunately, it happens all too often. According to the 2015 Kroll Global Fraud Report, 75% of participating construction companies reported fraud occurring within the last year. This number is the 2nd highest among all industries surveyed, (retail was the highest). Although an unfortunate fact there are steps that companies can take to educate themselves and reduce the chance of fraud from occurring. To help clients, prospects and others understand the most common fraud tactics; JLK Rosenberger has provided a brief summary below of the more common fraud tactics.
Common Fraud Tactics:
- Altering Pay Rates – It is common for payroll clerks to change the pay rates of various employees or contractors to a higher amount. When this is done, generally the payroll clerk will receive a kick back or pay off for their participation in the fraud. The longer this goes on generally the amount and type of fraud that is committed becomes greater and greater.
- Changing Deposit Records – Sometimes an accounting clerk takes payment received by a customer for themselves but marks the invoice as paid. Beyond this, those responsible for preparing deposits and taking them to the bank may start requesting small amounts of money back from the bank. To avoid detection the fraudster changes the paperwork to reflect the accurate deposit amount. This is a difficult tactic to detect especially if the person making the deposits also reconciles bank statements.
- Payroll Tax Fraud – If a company handles payroll internally then this tactic is unfortunately all too common. In this type of fraud, an accounting professional records payment to the IRS or state department of revenue for employees’ tax withholding and the companies matching amount. Unfortunately they don’t actually make the correct payment rather they funnel the money to themselves.
- Altering Change Orders – In this scheme, an accounting professional or other fraudster may create false change orders that require additional payment to a contractor or subcontractor. Common red flags include change orders missing a scope of work description, excess charges, omission of design specifics in scope description or improper price reduction for work substitution. Generally, these are all signs of trouble.
- Diverting Purchases – If a company has many projects going on at the same time it’s common that tools and materials are ordered directly to the job site. For this reason, it’s essential to ensure the materials the company pays for are actually used as intended. Dishonest professionals may charge new materials or tools to a company’s account but have them delivered to a different project site. It’s also wise to monitor purchase orders to determine if the orders seem excessively high for the scope of the work/project.
It’s unfortunate when fraud is suspected at a company because it ultimately means a betrayal of trust. At the first sign something seems wrong it’s important to take action and investigate. The longer the wait it’s possible the more money is being lost. If you are interested in reviewing your internal controls policy, or would like assistance with a fraud audit, JLK Rosenberger wants to help. For additional information please call us at 949-860-9902, or click here for email. We look forward to speaking with you soon.