Employee theft continues to be a major challenge for construction firm management. Now, a slumping economy, combined with rising consumer prices and a record number of foreclosures, could tempt more employees to help themselves to company property or funds.
An increase in construction employee theft—already estimated at $600 million —couldn’t come at a worse time for many firms facing revenue declines.
The answer: strong internal controls. When established and properly implemented, internal controls not only stem the tide of losses, but also help construction executives find unbilled revenue.
Employee theft is not limited to the pilfering of tools, equipment and building supplies. The big money is in financial theft—fraud and embezzlement. Even in the construction industry, where supplies and equipment on hand can be valued in the millions, cash is still the most valuable —and vulnerable—asset.
One construction firm lost approximately $1.5 million during a six-month period when the CFO and his recently hired bookkeeper conspired to siphon money from the firm through a fictitious supplier. The bookkeeper wrote checks to the fictitious firm and cashed them with the CFO. The volume of activity and money passing through the accounting department was so great that the deception went unnoticed until an audit uncovered their scheme six months later.
Checks and Balances
To avoid such a scandal, segregate duties and have a series of checks and balances in place. An employee with check-writing responsibility should not be in charge of reconciling accounts payable. Problems typically arise when one person controls the process of handling billing and collections, or processing vendor invoices and cash disbursements.
Payroll is another area that is always at risk for fraud. Large amounts of money can be stolen when an accounting department employee or manager in the field creates fictitious employees and deposits their checks. As a business grows, a construction executive may not know all employees by name, creating an opportunity to pay nonexistent individuals. Good internal controls call for the use of an employee outside of the payroll department to hand out checks. Even if a firm uses direct deposit, typically a slip is provided to show wages for that pay period and physically account for all employees. The company also can segregate the human resources function from the payroll function so new hires go through two people.
The purchasing function for the procurement of materials, subcontractors and supplies is another fertile area for collusion and kickbacks with suppliers.
Audits
Scheduled and unscheduled audits help eliminate sloppy recordkeeping, which invites fraud. Ensuring basic account reconciliations are up to date will help a construction executive feel confident with cash in and cash out reconciliation. Beware financial professionals who need to clean up the books before an auditor arrives, or who have their own system for maintaining accounts.
Protecting physical assets can be just as difficult. With many construction projects in progress, it’s often difficult to safeguard equipment, tools and supplies. Limiting access to supply areas and equipment and tool yards is an effective deterrent. If not possible, surveillance cameras and manned patrols can be extremely effective in reducing employee theft at each jobsite.
Additionally, performing inventories of supplies and equipment can indicate where thefts have occurred and allow for additional measures to be taken.
Internal Controls Enhance Billing
Establishing strong internal controls is critical to monitor funds, equipment and supplies, as well as track invoices and change orders. Sloppy recordkeeping in the field creates scenarios in which change orders are not billed, causing a construction firm to absorb the costs of the extra materials and work that should have been billed to the customer.
It’s impossible to eliminate all fraud and employee theft within a construction firm, but a strong internal controls program, especially when it’s communicated to the staff and monitored by management, can be a significant deterrent. An internal audit function and a proactive accounting firm help ensure a company implements and adheres to its internal controls.
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Wednesday, February 8, 2012