Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 51 views

    The Impact of Employee Fraud On The Construction Industry How Contractors Can Protect Their Assets

    Uploaded by

    Mike Karlins
    The document discusses employee fraud in the construction industry. It outlines common types of fraud schemes, like creating fake vendors or inflating invoices. It recommends implementing policies like segregating duties, requiring authorization of transactions, and reviewing bank statements to prevent fraud. Internal controls are important but have limits, like when collusion or management overrides occur.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd

    The Impact of Employee Fraud On The Construction Industry How Contractors Can Protect Their Assets

    Uploaded by

    Mike Karlins
    51 views5 pages
    The document discusses employee fraud in the construction industry. It outlines common types of fraud schemes, like creating fake vendors or inflating invoices. It recommends implementing policies like segregating duties, requiring authorization of transactions, and reviewing bank statements to prevent fraud. Internal controls are important but have limits, like when collusion or management overrides occur.

    Original Description:

    Fraud in the construction industry

    Original Title

    081513 the Impact of Employee Fraud on the Construction Industry How Contractors Can Protect Their Assets

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses employee fraud in the construction industry. It outlines common types of fraud schemes, like creating fake vendors or inflating invoices. It recommends implementing policies like segregating duties, requiring authorization of transactions, and reviewing bank statements to prevent fraud. Internal controls are important but have limits, like when collusion or management overrides occur.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    51 views5 pages

    The Impact of Employee Fraud On The Construction Industry How Contractors Can Protect Their Assets

    Uploaded by

    Mike Karlins
    The document discusses employee fraud in the construction industry. It outlines common types of fraud schemes, like creating fake vendors or inflating invoices. It recommends implementing policies like segregating duties, requiring authorization of transactions, and reviewing bank statements to prevent fraud. Internal controls are important but have limits, like when collusion or management overrides occur.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    THE IMPACT OF EMPLOYEE FRAUD ON THE CONSTRUCTION INDUSTRY: HOW CONTRACTORS CAN PROTECT THEIR ASSETS

    STEPHEN K. BALL AND JAMES J. KERN STEPHEN K. BALL, CPA, CVA, CCIFP, is the leader of Gross, Mendelsohn & Associates' Construction & Real Estate Group. He works closely with contractors to help improve their profitability and leadership development. He also helps contractors with succession planning, business valuation, and tax planning issues. Contact Steve at 410-685-5512 or sball@gma-cpa.com. JAMES J. KERN, CPA, CFE, is the director of Gross Mendelsohn's audit and accounting department. A certified fraud examiner, Jim enjoys the puzzle-like aspects of fraud investigation. He helps clients determine how a fraud was committed - and how the perpetrator concealed the fraud - by piecing together past actions. Contacthimat 410-685-5512 or via email at jkern@gma-cpa.com.

    Increased economic pressures can lead to an increased risk of fraud at a time when construction companies can least afford it.
    The Association of Certified Fraud Examiners (ACFE) recently issued the 2012 Report to the Nations on Occupational Fraud and Abuse, which estimates that the typical organization loses 5 percent of its revenues to fraud each year. According to the report, the median fraud loss sustained by companies in the construction industry was $300,000, ranking construction as the third highest out of 23 industries included in the report. 1 The construction industry has been hit extremely hard by the economic recession. Increased economic pressures can lead to an increased risk of fraud at a time when construction companies can least afford it.

    Understanding who commits fraud and why


    There are three conditions that are generally present when fraud occurs: 1. the individual is experiencing pressure; 2. the individual perceives there is an opportunity to commit fraud; and 3. the individual lacks personal integrity and rationalizes that committing fraud is justified.

    These three conditions - pressure, opportunity, and rationalization - are referred to as the fraud triangle. All three factors are usually necessary for a fraud to occur. Employees who commit fraud are usually motivated by pressure caused by financial problems, personal habits, or work-related issues. Financial pressure could result from excessive debts, medical bills, overuse of credit cards, divorce, or investment losses. Personal habits

    - such as drug, alcohol, or gambling addictions, extramarital affairs, and living beyond one's means - also create pressure. Work-related issues could include the employee believing he or she is underpaid, unappreciated, disrespected, or treated poorly. Opportunities to commit fraud arise when internal controls (proper checks and balances) are weak or nonexistent. In most cases, the employee who commits fraud is someone who is a "trusted" employee. Employees who have worked for a company for a long period of time usually gain more trust from their supervisors and coworkers, and therefore their actions may not be closely monitored. Also, the dollar amount of fraud losses tends to increase based on the number of years the employee has worked for the company and the employee's level of authority within that company. The personal integrity of most individuals keeps them from committing fraud. However, some employees rationalize their fraudulent acts. They might convince themselves that they are only borrowing the money and will pay it back, that the money is being used for a good purpose, or that the losses are covered by insurance so the company will not be hurt by them; they might have the mindset that "the company treats me unfairly and owes me." Fraud perpetrators typically do not have the characteristics usually associated with criminals. Most have no prior criminal record and no history of termination by a prior employer due to fraud. However, according to the ACFE report, in 81 percent of fraud cases the fraudster displayed one or more behavioral "red flags" that are often associated with fraudulent conduct.

    Look out for red flags


    Red flags are clues that a fraud might be occurring. Management should recognize behavioral red flags when they occur and take steps to investigate whether such clues lead to discovery of information that substantiates acts of fraud. However, be careful not to jump to conclusions based solely on the presence of a red flag. Examples of behavioral red flags identified in the ACFE report include:

    living beyond means; financial difficulties; unusually close association with vendor/customer; unwillingness to share duties, refusal to take time off; divorce/family problems; wheeler-dealer attitude; irritability, suspiciousness, or defensiveness; and addiction problems. 2

    Employee fraud schemes affecting construction companies


    While there are many types of employee fraud schemes, the most common types affecting construction companies include the following:

    creating fictitious vendors (dummy companies from which nonexistent services or materials are being purchased); check tampering (altering payee, altering amount, forging signature, and forging endorsement); taking kickbacks or inflating invoices from subcontractors; stealing job materials, tools, and equipment (or making unauthorized scrap sales); payroll (creating ghost employees or overstating hours worked); and making personal purchases or abusing expense reimbursements.

    Implementing fraud prevention policies


    Your management team should recognize that fraud can occur in any company (no matter the industry or size of the company) and that almost any employee may be capable of committing fraud given the right set of circumstances. Therefore, management should maintain a heightened awareness of fraud and implement fraud prevention policies. Creating a company culture that promotes honesty must begin with the "tone at the top" - the example set by the conduct of owners and management. Employees who observe owners and management acting in an unethical manner will consider such behavior to be acceptable. Construction companies should establish antifraud policies; this includes communicating to employees how to report suspected fraud and assuring employees that the company encourages such reporting. Honest employees are more likely to report fraud when the organization invites and encourages them to do so. According to the ACFE report, the most common method of detecting fraud, by a wide margin, was through employee tips. Employers cannot control an employee's financial pressures, personal integrity, or rationalizations. However, the employer can put controls and policies in place to limit the opportunities an employee has to commit fraud. It is much easier to prevent fraud than it is to detect fraud. Increasing the perception that fraud will be discovered is the most effective fraud prevention method. Most employee fraudsters are first-time criminals, and they are less likely to steal when they perceive there is a high probability they will be caught. No system of internal controls can fully eliminate the risk of fraud, but well-designed and effective internal controls can deter the average fraudster by reducing the opportunity to commit the fraud. Effective internal control includes a company culture of honesty and integrity (tone at the top), an effective and secure information system, and appropriate control and monitoring activities. There are a number of fraud prevention techniques that should be implemented by construction companies:

    Bank statements should be mailed directly to someone not involved in bank transactions (check writing, deposits, transfers, etc.), such as an owner, who should review the statements and cancelled checks.

    Bank reconciliations should be performed in a timely manner, preferably by a trained employee who is not involved in bank transactions.

    Duties should be segregated. For instance, the responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets should be assigned to different employees.

    Companies should require periodic job rotation and mandatory vacations. Companies should require authorization and approval of transactions with appropriate dollar limits - such as check signing, purchase orders, credit cards, etc.

    Physical controls over documents and records should be implemented, such as storing blank checks in locked cabinets and using password protection for computer files.

    Physical safeguards over assets should be implemented, such as security measures. Consider surveillance cameras to monitor materials, tools, and equipment.

    Companies should implement a whistleblower program. Companies should prepare timely, detailed, monthly financial statements closely reviewed by management.

    Why fraud controls break down


    There are limits to what internal controls can do to prevent fraud. It is impossible to implement internal controls that eliminate the possibility of fraud. Breakdowns in internal controls can occur for a number of reasons, including collusion and override of controls by management. Collusion is when individuals act collectively to perpetrate and conceal an action from detection. An individual in a management position may perpetrate a fraud by overriding controls and directing employees to deviate from the standard company policies and practices. Controls can also break down if well-designed internal control policies and procedures are not followed because management team members place significant trust in an employee and therefore do not believe it is necessary to perform the checks and balances with respect to that employee's work. In investigating employee frauds, the common refrain from owners and management is that they had complete trust in the employee and never expected the employee to steal from them. Policies are designed and put in place for a reason, and one should never deviate from company policies based on trust and a belief that an employee is not capable of committing fraud.

    Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse: 2012 Global Fraud Study (2012).

    Available at: http://www.acfe.com/uploadedFiles/ACFE_Website/Content/rttn/2012-report-to-nations.pdf.


    2

    Ibid.

    2013 Thomson Reuters/RIA. All rights reserved.

    You might also like