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With construction ramping up in many markets, construction firms plan to hire more workers, indicating the industry's continued optimism about a healthy economy. It's news that is both exciting and perhaps a little daunting: hiring competent, qualified tradespeople is challenging under any conditions. No one wants to hire a poor employee—or worse, someone who turns out to be a thief.

While no industry is immune to occupational fraud, the construction industry is one of the harder hit. The average construction fraud scheme costs business owners $227,000 before it is detected. Worse, the fraudster is very often someone the employer implicitly trusts, making it even harder to believe the company has been the victim of insider theft. Fraud can hurt a business's reputation, cost thousands and betray trust. It may seem uncontrollable and unforeseeable unless employers know how to detect and deter fraudulent behavior. 

The profile of a fraudster

In the movies, the bad guys may look menacing and easy to spot, but employee fraudsters are very often the most likable, friendly and trusted workers. Despite differences in job position and outward appearance, all fraudsters share the following three common traits.

  1. They harbor a secret, internal pressure. Internal pressure is the motivation behind the crime, which most often is financial in nature. Past due bills, mounting credit card debt, or gambling or addiction problems are common personal pressures that lead an individual to consider stealing. 
  2. There is the opportunity to commit fraud. Here, workers see an easy way to steal by abusing their authority and position in the organization. It can be a subcontractor who takes materials or an office manager who writes checks to herself or uses the company credit card for personal purchases. In any instance, the fraudster feels immune to discovery and has an opportunity to solve their financial problem in secret. 
  3. They can rationalize their actions. The fraudster may feel he is underpaid and deserves more, or that the money won’t be missed because the company is so large. Whatever the excuse is, it is enough to justify the means to the end.
Internal controls can prevent construction loss

The only way to prevent fraud is to control the opportunity to commit it. Here are six steps to reduce the likelihood of employee theft.

  1. Tone at the top. Fostering a culture of honesty starts with management running the business ethically and with integrity. General contractors, construction executives and other leaders should model the behavior expected of all employees. 
  2. Conduct a background check on all employees and before signing an agreement with a subcontractor or supplier. For subs and vendors, this should include a review of their financial statements, credit history and solvency.
  3. Segregate job duties. Avoid having one person who is responsible for receiving payments, logging payments and approving invoices. These functions should be separated to mitigate potential asset misappropriation or paying for goods that were never received. 
  4. Encourage whistleblowers to speak up. The most common way fraud is detected is when someone says something because he suspects something isn't right. Pay attention to tips, even if they are based on a hunch. It's better to be safe than sorry.
  5. Monitor employee habits. It can be easy to perceive an employee who never takes vacation or calls in sick as devoted and hardworking. However, it can also signal a worker who has something to hide and is fearful someone will detect fraud if he were out of the office.
  6. Owners or management should review bank statements and canceled checks each month. The same goes for a review of payroll reports and credit card statements. Adopting this practice can help uncover anomalies and thwart potential fraud.

Fraud happens when employers take their eyes off of their business’ cash flow operations. By understanding the traits of a typical fraudster and steps to take to reduce the likelihood of insider theft, construction business owners can focus on protecting their liabilities, securing new contracts and overseeing their clients’ projects.


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