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While everyone else has been focused on the pandemic, swindlers have been focused on committing fraud. The COVID-19 crisis has created the perfect storm for an increase in fraud and occupational abuse cases. The 2020 Report to the Nations issued by the Association of Certified Fraud Examiners (ACFE), states that the median loss was $200,000 in the 80 construction fraud cases examined in 2020. This compares to a median loss of $125,000 across all industries globally and $139,000 in the United States and Canada. The typical fraud case lasts 14 months with a loss of $8,300 per month. The average loss per fraud case globally is $1,509,000 and $563,000 in the United States and Canada. There is a substantial difference when looking at the median and average numbers.

The ACFE found that 21% of fraud cases caused losses of more than $1 million and organizations lose 5% of revenue to fraud annually. Projected against the 2019 Gross World Product, that is more than $4.5 trillion lost to fraud globally each year.

Impact of the Pandemic on Fraud

The number of occupational fraud cases are increasing in response to the pandemic. ACFE published the findings of another study in Fraud in the Wake of COVID-19: Benchmarking Report. As of November 2020, 79% of the respondents reported an increase in fraud cases and 90% expect an increase.

The fraud schemes across all industries that have been impacted the most by the pandemic are cyberfraud (85% overall increase), identity theft (73% overall increase), payment fraud (72% overall increase), unemployment fraud (69% overall increase), and fraud by vendors and sellers (67% overall increase).

Most Common Construction Occupational Fraud Schemes

ACFE identified that corruption (47%) is the most common type of occupational fraud scheme in construction. Corruption is also the most common scheme in every global region across all industries. Corruption includes giving or accepting bribes or inappropriate gifts, double-dealing, under-the-table transactions, manipulating results, diverting funds, laundering money and defrauding investors.

Financial statement fraud (25%) was the second most popular fraud scheme, followed by billing (22%), cash larceny, non-cash and payroll (13% each), cash-on-hand (12%), expense reimbursements (9%) and register disbursements (4%). Smaller businesses with fewer than 100 employees experienced twice as many billing and payment fraud cases and four times the number of check and payment tampering incidents than their larger counterparts.

Financial statement fraud schemes are the least common method identified by ACFE (10% of cases across all industries) and most costly ($954,000 median loss). Asset misappropriation schemes are the most common (86% of cases across all industries) and least costly ($100,000 median loss).

Other Types of Construction Fraud Schemes

Contractors can commit fraud during almost every phase of construction. Some contractors are involved with bid-rigging where contracts are awarded by tipping the competitive bidding process in favor of a contractor. Bid suppression occurs when a contractor is threatened or bribed not to submit a bid. Subcontractors are promised a large amount of work in exchange for not submitting their own bid on a project. Fraud bidding schemes can be identified by watching for trends like identifying contractors that always or never awarded bids.

Falsifying payment applications and invoices are also common methods used in construction fraud cases. These include inflating labor and material costs, using improper wage rates or categories, billing for underperformed work and payments outside the scope of the work. Contractors must have the systems in place to ensure that all invoices and payments are checked against the contract with each supplier. Employment agreements and time sheets should also be checked to make sure the right amounts are paid.

Change orders and schedules of values (SOV) are very vulnerable to fraud. They should be checked against the original bid to ensure that there is not an increase in the cost or a substantial change to the scope of the work. Contractors should get in the habit of tracking and documenting all changes on the job, including the reason why and who is involved. Look for trends that point to collusion.

Materials and equipment should be logged in when they are accepted on a job and tracked as work progresses. Require subcontractors to submit receipts identifying the brand and the amount purchased to reduce the likelihood of fraud. Also log in the time and use of each piece of equipment, including the name of the operator.

Control Weaknesses

Control weaknesses impact the type of occupational fraud schemes and the amount of the loss. ACFE found that the lack of internal controls (32%), override of internal controls and lack of management review (both 18%) and poor tone at the top (10%) need improvement. Having a poor tone at the top has a considerable impact on financial statement fraud (22%), corruption (15%), and asset misappropriation (8%) across all industries.

Fortunately, there are honest employees who take it upon themselves to report fraudulent activity. Forty-three percent of schemes were detected by a tip in the cases ACFE examined, nearly half of which came from employees. Organizations with fraud awareness training in place were more likely to get tips through formal reporting mechanisms such as an email or telephone hotline.

Fraud can ruin a business. Establish protection and detection policies to limit exposure and losses by having zero tolerance for fraud. Swindlers will be more hesitant to commit fraud if they know they are being watched and sufficient controls are in place.

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