According to the Association of Certified Fraud Examiners’ 2018 Report to the Nations on Occupational Fraud and Abuse, the construction industry is the ninth industry most often impacted by fraud with the fourth-highest in median loss at $227,000. Fraud affects an organization’s bottom line in many ways, and few companies know why it occurs, what to look for or how to stop it. Savvy contractors should recognize the most common types of construction company fraud and adopt strategies for preventing and detecting fraudsters’ misdeeds.
Five percent of revenue is lost to internal fraud and abuse each year. The median for construction industry is $227,000, significantly higher than the median for all industries of $130,000. There is also the cost of external assistance and the looming potential for higher insurance cots in subsequent years. Additionally, there is the non-monetary loss to reputation and opportunity costs, which can oftentimes be more damaging.
In 53% of the reported frauds, there was no recovery—money was often gambled away. For 15% of reported frauds where there was a full recovery, the source of recovery was usually an insurance policy.
Look closely at the Management Liability and Cyber Insurance Applications. They not only speak to the different types of coverages available, but also provide an outline of good thoughts to self-evaluate an internal program. Also, make sure that actual business practices track representations on the insurance applications, as inconsistencies could result in coverage denials at the time a claim is made.
Cyber coverage traditionally covers risks with privacy and loss or theft of personally identifiable information, while crime coverage usually covers theft of money and certain property. Policy wording and exclusions are designed to keep one policy line from covering risks intended to be covered by another.
Fidelity Bonds are insurance products which specifically target deceitful acts, not mistakes or oversights. They are commonly designed on a “claims made” basis. There are numerous different types of fidelity bonds—e.g., Business Services Bonds (protects customers from dishonest acts by employees) and Employee Dishonesty Bonds (protects employers from their own employees’ dishonest acts like theft, embezzlement and forgery). Specific costs will vary, but a general guideline is that fidelity bonds typically cost anywhere from .5% to 1% of the coverage amount.
For good or bad, the United States is not alone in dealing with occupational fraud. According to the Association of Certified Fraud Examiners’ 2018 Global Study on Occupational Fraud and Abuse, data gathered showed occupational fraud occurring in 125 different countries and in 23 different industries. Among the characteristics of perpetrators noted in the study were:
Anti-Fraud Controls for Billing Fraud
Any scheme in which a person causes his or her employer to issue an irregular payment for goods or services (whether through an inflated or false pay application, change order abuse, billing for costs associated with another project, etc.) is billing fraud. Scrutinizing pay applications helps to not only safeguard against errors, but also helps to address potential fraud. The same is true for change orders, which should include appropriate justification. For example, be mindful of numerous, unusual or unexplained change orders for a specific subcontractor, which are approved by the same employee.
Look for things such as:
Cost-Effective Methods to Help Prevent Fraud
Among the most effective methods to help prevent fraud is to involve numerous employees in the accounting process. Examples include having two staff members review and sign checks over a set amount, and having one employee periodically conduct an independent review of payments to vendors. Also, put in place appropriate segregations of duties.
The ACFE’s 2018 Global Study on Occupational Fraud and Abuse stated that tips from hotlines were the biggest means of fraud detection. More than 40% of all fraud is detected by a tip. Fraud losses are estimated to be 50% smaller for organizations with hotlines than those without.
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