Have You Been a Victim of Fraud?
Jim Jordan is
director of construction services for Dallas/Fort Worth-based
Weaver and Tidwell LLP.
Although fraud occurs at all business
types, the construction industry should be particularly vigilant.
The most important step a contracting firm can take, Jordan
writes, is to make it clear that unethical behavior will not
For the past several years, corporate fraud has been one
of the most reported crimes in America. In a way, that's good
because owners and shareholders of private and public companies
are now aware that fraud is expensive and must be prevented.
The bad news, of course, is that corporate fraud is too common.
In fact, it's all around us - particularly in the construction
industry. Across the globe, corruption consumed 10 percent
of the world's total construction in 2004, a year in which
contracts totaled $3.9 trillion, according to Transparency
International. That means $390 billion was pilfered. A 2004
report by the Association of Certified Fraud Examiners states
that the typical U.S. organization loses 6 percent of its
annual revenue to fraud and 40 percent of those organizations
never recover any of their losses.
In terms of domestic corruption, a top Justice Department
official said last year that the construction industry generates
the most corruption cases in America. These cases may involve
bribery, theft of money or property, theft of trade secrets,
misrepresentation or concealment of material facts or breach
of fiduciary duty. It also can come from various directions:
Contractors can defraud owners; employees can steal from their
Even employees of construction firms can use their companies
to steal from the project owner. That is what occurred between
2000 and 2005 at Tampa, Fla.-based PBS&J, according to
the U.S. Justice Department. Earlier this year it was disclosed
that three PBS&J company executives embezzled $36 million
by overstating expenses billed to transportation departments
in Texas, Florida, Georgia and Nevada. The executives currently
are negotiating a plea deal with federal prosecutors. But
the company is left with the financial burden of making restitution.
Fraud, however, most often occurs at small- and mid-sized
firms. These firms by necessity often allow employees to wear
many hats whether qualified or not. The most common forms
of fraud include:
Cash Schemes Without the
proper internal controls, those with access to a company's
cash can misappropriate funds in various ways including skimming,
altering cash receipts, creating fictitious refunds and discounts
and kiting. Inventing expenses is particularly common. In
a study conducted by Ipsos Reid, 7 percent of respondents
said they knew people who inflated expense accounts. While
the study showed that employees under age 35 are most likely
to commit this fraud, managers inflated their expense accounts
by larger amounts.
Inventory Schemes More
than a few company owners have learned the hard way that unprotected
inventory is a treasure trove for the larceny-minded. The
two most common forms of fraud are embezzlement of scrap proceeds
and the appropriation of inventory for personal use.
Purchasing Schemes Without
formal controls and safeguards, purchasing functions can be
manipulated for fraudulent purposes. Acts of deception may
include fictitious invoices, unapproved paychecks made out
to employees, over billing and excess purchasing of property
Fixed Assets Many contractors
fail to pay close attention to fixed assets such as trucks
and equipment. Unscrupulous employees many find it easy to
steal or make personal use of company assets.
Although fraud occurs at all businesses, the construction
industry needs to be particularly vigilant. Our business is
inordinately dynamic, with projects spread across a wide geographical
area. It's a difficult process even for large contractors,
who are more likely to employ trained auditors and have formal
internal controls. In Texas, however, the majority of contracting
operations are relatively small and few have anything other
than rudimentary financial checks and balances. Many of these
companies fail to even obtain employee dishonesty bonds on
One major problem at smaller companies is that a single employee
- a bookkeeper, office manager or even administrative assistant
- often is assigned multiple responsibilities. When one of
those disparate responsibilities is financial oversight, an
environment for fraud is created. When financial responsibilities
are segregated, it's harder for an employee to cover up pilfering.
Although smaller contractors may not have the resources to
hire full-time forensic accountants or even CPAs, there are
inexpensive ways to reduce fraud. Again, one of the most important
steps is to segregate banking responsibilities from accounts
receivable and accounts payable functions. At the same time,
owners should require dual signatures on all checks, including
theirs. Owners can request that they receive all bank statements
before they are opened.
Another precautionary step an owner can take is to mandate
a week of vacation for all employees. This allows the company
to temporarily hand bookkeeping responsibilities to someone
else. That person may notice something odd about the accounting.
And outside accountants should be retained periodically to
review the work of those making financial decisions.
Company owners should create a hotline or similar system
that allows employees to anonymously report evidence of wrongdoing.
Owners should do more than merely threaten. They should demonstrate
by their actions a strong commitment to ethical behavior and
remind employees that fraud is not just unethical it is criminal.