Importance of Robust Internal Controls
The construction demand in Southern California continues to increase. According to MGAC’s, Los Angeles Construction Mid-Market Year Report 2018, the number of construction permits issued in Los Angeles County at the end of March 2018 exceeded the total number issued in the prior year. This large increase reflects the volume of new projects and opportunities for industry companies in the region. These changes have led to essential shifts such as the integration of technology which helps to reduce costs, streamlines processes and eases current labor challenges. While navigating the changing environment, it’s important not to forget the need to revisit essential practices such as internal controls. Not only do robust internal controls help to reduce fraud opportunities, but also facilitates a system of checks and balances that protect the vitality of the company. To help clients, prospects and others understand the risks and identify internal controls best practices, JLK Rosenberger has provided a summary of key information below.
Fraud in the Construction Industry
According to a report recently issued by the Association of Certified Fraud Examiners, construction companies experience a median loss rate of $227,000 when fraud is committed. The most common types of fraud tactics include corruption, billing schemes, expense reimbursement, and noncash misappropriation, check and payment tampering as well as financial statement fraud. Unfortunately, the nature of the construction industry leaves companies exposed from several sources which include not only employees but vendors and suppliers.
Limiting Exposure Through Robust Internal Controls
Establishing and regularly reviewing internal controls policies can help to reduce the opportunities for fraud and other inappropriate activities. Even if fraud does occur, internal controls can help to uncover the activity sooner while limiting the damage to the company. Below is a list of best practices companies should consider when reviewing policies.
- Install security cameras
- Conduct on-site inspections of materials and equipment
- Secure equipment and supplies after-hours
- Perform surprise on-site visits to inspect procedures, ensure there are no ghost employees, and monitor equipment and supplies
Subcontractors and Suppliers
- Request and verify receipts for all charges
- Obtain written documentation from subcontractors to protect against violations and misrepresentations
- Review the bidding process and check for any potential improper relationships or illegal incentives
- Check references and perform credit checks
- Segregate duties related to accounts payable and receivable
- Request receipts for invoices where the material cost seems high or inflated
- Match invoices to work orders
- Require dual signatures on checks
- Ensure workers are properly classified
- Utilize direct deposit and electronic confirmations of payroll and labor
- Implement policies on revenue recognition, financial statement preparation, and accounting methods
The construction industry is experiencing rapid growth and opportunity in several sectors in Los Angeles and Orange County. While the growth opportunity is exciting for management and business owners, it’s essential to ensure your internal policies and procedures, including internal controls, are reviewed regularly for maximum effectiveness. If you have questions about internal controls best practices or need assistance with a construction audit or tax 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.