Fraud Tips for contractor/trades and professionals.

Construction projects are minefields of potential financial risks for the unwary contractor. Theft of equipment, fraudulent pay applications, shell companies, inefficient labor, substandard materials, bid rigging and bribery are just a few of the fraudulent activities that can take place during a construction project.

Who commits these crimes? Statistically speaking, a fraudster can be anyone, regardless of gender, age, position of responsibility or tenure with the company. As long as there are situational pressures, opportunity and rationalization in the mind of the perpetrator(s), fraud will continue to plague contractors across the country.

Can a company keep all fraud from being committed on its jobs? Probably not, but there are proactive steps that contractors can take to minimize their risk, and improve the success of fraud detection measures.

Conduct Background Checks While many companies will conduct criminal background checks on new employees, they do not run such checks on employees as they are promoted to positions of trust and responsibility. Even if they did, background checks would not always weed out the fraudster – the right conditions for fraud (situational pressure, opportunity and rationalization) may not occur until after the person has been an employee for some time.

Create a Code of Ethics It should be in writing and cover how the company will conduct its external business dealings, and how the company expects its employees to conduct their business. All employees should be required to execute an annual compliance statement that they have not violated these expectations. Suppliers and subcontractors should also agree to abide by the code of ethics before conducting business.

Require Fraud Awareness/Ethics Training Coupled with the organizational code of ethics, fraud awareness and ethics training has been shown to be effective at reducing the average fraud loss to half of what it is in organizations without this training.

Start a Whistleblower Hotline 24/7 access to an anonymous hotline allows employees to disclose a tip about a potential fraud without fear of confrontation. This is critical, as the majority of fraud schemes are discovered either by tips or by accident.

Conduct Internal Audits An internal audit program demonstrates an organization’s commitment to its ethics program. Research suggests that organizations with an internal audit program have a shorter average duration to their fraud schemes, with smaller average losses than those without an internal audit program.

Conduct Surprise Audits Surprise audits, either on a project or on an internal basis, are the least commonly used method of fraud deterrence. However, research by the Association of Certified Fraud Examiners suggests that fraud detection is quicker and smaller average losses are incurred when surprise audits are conducted.

Screen Suppliers/Subcontractors Treat a supplier or subcontractor just like you would your own employees by screening them before establishing a business relationship. How long has the company been in business? What is their track record? Who have they worked with in the past? What do customers say about them?

Watch Out for Conflicts of Interest Keep an eye out for any personal relationships that might exist between your organization and a supplier or subcontractor. For example, are there common family members in responsible positions in both organizations? While this alone is not necessarily a problem, it does suggest that the proposed relationship should be scrutinized a little more carefully.

Include a Right to Audit Clause This allows a company to inspect the books and records of subcontractors for any reason for a defined period after the job ends.

Protect the Procurement Area Routinely reconcile the quantity of materials estimated, ordered and delivered by project. Compare the pricing received for materials from one vendor across multiple projects or across multiple vendors. There will be some deterrent effect once people are aware that you’re looking.

Conduct Random On-Site Audits Periodically announce that there will be an audit of a specific project, either performed internally or through the use of contract auditors. These audits should include an assessment of labor costs, materials, equipment usage and job site security procedures. They should reconcile material requisitions and deliveries with estimates and account for any significant differences. Attention should also be given to change orders – a common area of fraudulent activity.

If it were possible to pick a potential fraudster out in a crowd, fraud prevention in construction and any other business would be a cinch. It takes knowledge, awareness and vigilance to cultivate and keep honest, ethical business relationships.