Success in the construction industry requires management to carefully manage every aspect of a project. Depending on the size of the project there may be several variables to consider including subcontractor and skilled craftsman, material purchasing and delivery, equipment rentals, scheduling and change order management. In other words, keeping a project moving forward requires considerable experience and skill with any delays potentially causing an impact on profitability. One area that construction companies need to also focus on is fraud prevention. Unfortunately, it’s a reality of doing business and if not properly monitored can cost a company significantly. According to the American Institute of Certified Fraud Examiners, 2018 Global Study on Occupational Fraud and Abuse, construction companies face the 4th highest loss per incident of all industries surveyed. To help clients and prospects understand the trends and impact, Hanson & Co has provided a summary of key survey findings below.
About the Survey
The 2018 report is based on information collected by the Association of Certified Fraud Examiners through an online survey which was conducted July 2017 through October 2017. Participants were asked to provide information on the largest fraud case they investigated that met four key criteria including the following:
The case must have involved occupational fraud.
The investigation occurred after January 2016.
The investigation must be completed.
All suspect perpetrators must have been identified.
There were 2,690 cases examined in the study of which 90 occurred at construction industry companies.
Key Fraud Findings
Average Loss – The median average loss for cases reporting during the study for the construction industry was $227,000. The highest loss per case was within the communications and publishing industry which had a per-incident loss of $525,000 followed by energy companies which experienced a $300,000 per incident loss. The average loss per incident for construction companies was on the higher end of the spectrum which highlights the need for management to implement and regularly review fraud prevention measures in place in both the office and on job sites.
Common Types of Fraud – The type of fraud perpetrated varies by business model and industry specialization. According to the survey, 42% of cases involved corruption, 37% involved billing fraud, 23% involved expense reimbursement fraud and 23% involved noncash fraud. Other notable fraud schemes included check tampering, cash larceny, skimming and financial statement fraud. Although this information is taken from a variety of companies it does provide insight into how fraud is commonly committed and where management can focus their prevention efforts.
Anti-Fraud Controls – As management considers which anti-fraud controls to implement at their company it’s important to understand which have the highest impact on fraud prevention. Survey participants were asked to reveal which fraud controls were in place when issues were uncovered. According to the survey, 80% of respondents had a code of conduct policy, 80% an external financial statement audit, 73% an internal audit department, 63% used a fraud reporting hotline, 54% used employee support programs and 54% had a formal anti-fraud policy. Other notables included surprise audits, formal fraud training for employees and managers as well as rewards for whistleblowers.
Impact of Controls on Fraud Duration – The study also examined how the presence of various anti-fraud controls impacted the duration of the illegal activity. According to the survey, proactive monitoring of data resulted in a 58% reduction in fraud duration, surprise audits resulted in a 54% reduction, and internal audit resulted in 50% reduction, rewards for whistleblowers results in a 50% reduction, an external audit of financial statements resulted in a 38% reduction and an employee support program resulted in a 33% reduction in duration. Clearly certain techniques can more quickly reduce the duration of fraud and potential loss to a company.
Fraud is an unfortunate reality of business for all companies with certain companies facing larger risks than others. For that reason, it’s essential to understand ongoing trends and implement the appropriate safeguards. If you have questions about this report, its findings or need assistance with a construction tax, audit or accounting issue, Hanson & Co. can help. For additional information please call us at 303-388-1010, or click here to contact us. We look forward to speaking with you soon.