How vulnerable are construction companies to fraud? Would you believe they suffer annual financial losses at almost twice the rate of other businesses? Last year, the Association of Certified Fraud Examiners released its Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse, which claimed that organizations victimized by fraud lose a median $130,000. However, construction companies showed a median loss of $227,000.

What makes construction such a vulnerable industry? Well, as any casual viewer of The Sopranos could tell you, there are several factors. Corruption plays a major role when it comes to government contracts and international construction projects. The materials used in construction are inherently valuable and can be re-sold easily in secondary markets. This leads to overbuying schemes, where excess materials seem to get up and walk away on their own, and fraudulent purchases which are really just company checks converted to cash. Employment is transient, so the boss may not have a clear idea of which or how many employees are working on a project at a particular time, opening the door to payroll fraud. Finally, the head of the company may know a great deal about building, but very little about finance.

So, if you operate a construction business, how can you protect your company from fraud? At Breon & Associates, we believe the minimum you should do is adopt this antifraud checklist, designed to help you tighten your internal controls:

• Spring surprise audits on your record keepers
• Make surprise jobsite visits
• Segregate duties so that one person does not handle multiple financial transaction or accounting tasks
• Review bank statements for unfamiliar payees
• Review cancelled checks for forged signatures
• Have someone other than the purchaser review vendor invoices, purchase orders and other documents
• Use prenumbered purchase orders and check the sequencing
• Physically check materials and supplies to ensure they correspond to what was ordered in terms of quantity and quality
• Scrutinize change orders, which can represent illegal transactions
• Verify your bid processes
• Prepare annual budgets and compare results to projected budgets. Discrepancies can indicate fraud.
• Have an independent party verify worker names and pay rates on your payroll
• Pay employees via direct deposit instead of by check or cash.
• Require full time employees to take vacation time. If an employee is committing fraud, it could be exposed in his absence.

Simply being vigilant about fraud can be a powerful deterrent. But anti-fraud measures can also make your company more efficient as you discover accounting errors, reduce waste and improve your cash flow. However, to get the full benefit of a robust anti-fraud program for your business, contact Breon & Associates today.