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Managing a successful construction company is a challenging task. There are multiple variables that demand attention across all operational areas of the company including talent acquisition and retention. The elevated level of construction activity has left many companies struggling to find, recruit and retain skilled craftsman and other professionals which complicates the situation. The focus is usually on keeping projects on-time, on budget, profit margins high and new projects coming in. With the focus on these essentials, fraud and fraud prevention is often not top-of-mind. Unfortunately, fraud is a regular occurrence in any company and appropriate measures should be enacted to limit opportunities for fraudsters. According to the 2018 ACFE Global Study on Occupational Fraud and Abuse, construction companies experience one of the highest per incident losses due to fraud. To help clients, prospects and others understand the data and its impact, JLK Rosenberger has provided a summary of key information below.
About the Survey
The 2018 report is based on information collected by the Association of Certified Fraud Examiners through an online survey which was conducted between July 2017 and October 2017. Participants were asked to provide information on the largest fraud case they investigated that met four key criteria. The case must have involved the following:
- Occupational fraud
- An investigation occurring between January 2016 and time of survey
- The investigation must be complete
- Surveyors must be certain the perpetrator/s were identified.
Questions focused on the case, perpetrator/s, victims and methods of fraud used in the crime. There were 2,690 cases examined in the study of which 90 occurred at construction industry companies.
Key Construction Fraud Trends
- Average Loss – The median average loss in the cases reported during the study for the construction industry was $227,000. Communications and publishing companies experienced the highest per case loss averaging $525,000, followed by energy companies with a loss per case of $300,000 and then construction companies. Although construction didn’t have the highest loss per case it ranked amongst the top three signaling how costly fraudulent activities can be to a company.
- Impact of Loss – The size of the company also played a role in the loss experienced. For companies with less than 100 employees the average loss was $200,000 per incident, 100 – 999 employees experienced an average loss of $100,000 per incident, 1,000 – 9,999 employees experienced an average loss of $100,000 and companies with greater than 10,000 employees had an average loss of $132,000. The unfortunate truth is that the smaller the company the greater the opportunity for loss.
- Common Types of Fraud – Since company operations vary by industry it makes sense the most common types of occupational fraud perpetrated would also vary. According to the study, 42% of cases were caused by corruption, 37% by billing issues, 23% by expense reimbursements and 19% by check and payment tampering. Other notables include skimming, payroll fraud and larceny.
- Common Anti-Fraud Controls – Many of the victim organizations had one or more anti-fraud measures or programs in place during the timeframe fraud was being committed. According to the study, 80% of victim organizations had a code of conduct, 80% conducted an external financial statement audit, 73% had an internal audit department, 66% had a hotline, 54% an anti-fraud policy and 53% had fraud training for employees.
- Background Checks – Identifying criminal history before hiring an individual is the best way to limit the exposure to becoming victimized by a potential fraudster. The study examined the policies of victim companies to determine if background check practices existed and what specific part of the individuals background was examined. According to the study, 78% of companies conducted an employment history verification, 75% a criminal background check, 55% reviewed references, 50% verified educational credentials and 36% ran credit checks. The study determined that only 52% of victim organizations ran any type of background checks and that in 10% of cases the victim organization was alerted to an issue and hired the individual anyway.
While never welcome, fraud is something construction companies should prepare for and implement safeguards to prevent. While the study shows that victim companies did have certain policies in place, they were inadequate to prevent illegal behaviors from going on undetected. For this reason, it’s important to review internal policies and programs to ensure your company is thoroughly protected. If you have questions about the study or need assistance with a construction tax or audit issue, 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.