Any type of company is vulnerable to fraud, and construction contractors are among the most at risk.
Contractors have money constantly coming into and going out of their office for equipment, tools, supplies and other job costs. They have operations spread out across the city, state and nation. For all these reasons, contractors must always be on guard against fraudulent activity.
Where could fraud be taking place?
The best question to ask yourself is: “Where are we vulnerable?”
The answer will change as the company grows or takes on different kinds of jobs. You should address this question regularly and answer honestly. Sometimes fraud can be taking place right under your nose by someone you have trusted for years.
For example, say you have a project that produces an abundance of scrap metal. This material can be a valuable commodity, especially during periods of economic uncertainty. Just look at the price of copper over the last five years.
A dishonest employee could order more metal than is needed for a job and hide the cost in the job reports. The extra metal can then be scrapped for cash, and may never be discovered if it is insignificant to the job as a whole.
To prevent this type of fraud, make sure that no one person is responsible for both ordering materials and then approving their payments. Additionally, someone other than the person ordering the materials should check the materials when they arrive at the job sites.
Material budgets should also be prepared prior to the start of the job so that management or ownership knows the amount of materials needed for that job.
Is your office safe from external fraud?
Fraud risk doesn’t stop at the job sites. It can happen in the office, too. To begin with, you must keep your office staff alert to external scams of all sorts.
One example that is shockingly simple is the “dead vendor” scheme. The fraudster sends you an invoice that appears to be legitimate from a company that is either closed or about to close because the owner of the company has either passed away or retired.
Before the contractor realizes the company is “dead,” the contractor remits payment for the invoice. To guard against this kind of scheme, use an approved vendors list that is reviewed periodically. Also, train your staff to pay close attention to invoices and double check unfamiliar orders and vendors.
If you frequently use electronic funds transfers to pay bills, make sure that such transfers require two people to complete the transaction. Not only will this deter theft by someone in-house, but it will help protect you against “phishing” scams in which Internet culprits can gain access to your computer and attempt to steal money from your bank account.
One story involves a company’s controller who was paying bills online for the company, and unbeknownst to her, opened a malicious email that gave the sender access to her computer. She then walked away from her desk for a few minutes, and when she returned, a large electronic funds transfer was withdrawn from the company’s account.
She immediately asked her boss if he had made the transfer, and when he said “No,” she called the bank to put a stop-payment order on the transfer.
But by the time the banker tried to recall the money, he could not reverse the transaction because the funds had already been withdrawn and the account closed. Had the company required two authorizations to complete the transaction, the fraud would not have happened.
Are you in control of internal fraud?
Construction companies are, unfortunately, subject to the same internal threats that all businesses face. To protect yourself and your employees, be proactive. Establish internal controls that make it difficult for fraudsters to succeed, such as segregating access to assets (cash, receivables, etc.) from access to record keeping.
This makes it more difficult for a perpetrator to embezzle and cover his tracks. Adopt a zero-tolerance policy toward any type of unethical behavior. Also, take the time to screen new employees and perform background checks to make sure you get top quality people with no skeletons in their closets.
No contractor can see everything that goes on at his or her construction company. But by always being alert to the latest fraud threats, you can increase the likelihood that you’ll deter those who try to steal from you and catch those who do.