MLR

Three places to look for construction fraud

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As the economy continues to challenge everyone, the motivation for some employees to steal isn’t difficult to understand.

Business owners would be prudent to put safeguards in place to prevent fraudulent activities.

money and handcuffs

One way to divide and potentially conquer perpetrators of fraud is to focus on the three primary areas where fraud typically can occur: in the office, during banking transactions and on the job site.

1. In the office

The bulk of your work may take place on the job site, but the money you earn from that labor is processed in the office. So your office may, in fact, present your greatest fraud vulnerabilities.

You’ve probably heard that you should be dividing accounting and finance-related responsibilities among two or more employees. Are you?

Segregation of duties is one of the main internal control procedures. Some contractors set up this measure at one point but let it go following staff cuts. If you’ve become vulnerable, consider having someone independent of the purchasing or vendor payment functions review all new supplier entries.

In addition, invite your CPA to the office from time to time. Random, unannounced visits can help identify dangerous gaps in your controls and procedures. These audits also put potential wrongdoers on notice that your eyes are open and they could get caught.

2. At the bank

That term is used figuratively. It’s hoped that no one at your bank is defrauding you. Rather, there’s the chance that your own employees could misuse bank transactions for their own benefit.

If you have not already done so, check into whether your bank provides “Positive Pay” check-matching services. Typically, this means you send the bank a list of checks that have been written each day, and it matches the account number, check number and dollar amount of each check presented for payment against the list you sent.

You can take other bank-related steps. For example, don’t use signature stamps for checks, and prohibit checks payable to cash. Set a dollar limit for which checks can clear without the bank contacting you for authorization. Additionally, someone besides the clerk in charge of cash should receive the bank statements and prepare the reconciliation, and a member of management should review it.

3. On the job site

Naturally, you need to do everything you can to prevent the outright theft of cash, tools and equipment from job sites. A periodic inventory of tools and equipment, and an asset tracking/management system, helps to eliminate this fraud.

But, don’t forget another common source of project-related losses: fraudulent incentive arrangement claims. You set up these plans to drive productivity. But a foreman or project manager, desperate for cash or just plain greedy, might shift costs around to create the illusion of savings.

Combat this by preventing anyone who stands to earn extra pay from assigning job costs without a secondary sign-off. Hold regular job status meetings, and reconcile the initial contract budget to actual, looking for these types of discrepancies.