Preventing Fraud in and on Your Company
By Mike Crabtree
Fraud is an ongoing concern for practically every industry today. However, construction firms have historically been especially susceptible to an ever evolving number of fraudulent schemes.
While we would all like to believe that our employees are loyal and working for the benefit of the organization (and most of them probably are), there are still many reasons why your employees may commit fraud and several ways in which they might do it. Even more so, collusion between employees and suppliers and even between owner representatives and subcontractors gives ample reasons to be on guard. Prevention and detection are crucial to reducing these potential types of losses. Every organization should have a plan in place as preventing fraud is much easier than recovering losses after a fraud has been committed.
Types of Fraud
Fraud comes in many forms but can typically be broken down into three categories: asset misappropriation, corruption and financial statement fraud.
Asset misappropriations are schemes in which an employee steals or exploits its organization’s resources. Examples of asset misappropriation are stealing cash before or after it’s been recorded, making a fictitious expense reimbursement claim and/or stealing non-cash assets of the organization.
Corruption schemes happen when employees use their influence in business transactions for their own benefit while violating their duty to the employer. Examples of corruption are bribery, extortion and conflict of interest.
Financial statement frauds are schemes that involve omitting or intentionally misstating information in the company’s financial reports. This can be in the form of fictitious revenues, hidden liabilities or inflated assets.
It is vital to an organization, large or small, to have a fraud prevention plan in place. The following procedures can help to minimize the potential for fraud in your organization.
- Know your Employees. Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud. It is important for management to be involved with their employees and take time to get to know them. Often, an attitude change can clue you in to a risk. For example, if an employee feels a lack of appreciation from the business owner or anger at their boss, this could lead them to commit fraud as a way of revenge. Any attitude change should cause you to pay closer attention to that employee and to look for ways to improve that employee’s experience.
- Make Employees Aware/Set Up Reporting System. Awareness affects all employees. Everyone within the organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them. Those who are planning to commit fraud will know that management is watching and will hopefully be deterred by this. Honest employees who are not tempted to commit fraud will also be made aware of possible signs of fraud or theft. These employees are assets in the fight against fraud.
- Implement Internal Controls. Internal controls are the plans and/or programs implemented to safeguard your company’s assets, ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of duties is an important component of internal control that can reduce fraud from occurring.
Documentation is another control that can help reduce fraud. Make sure all checks, purchase orders and invoices are numbered consecutively. Use “for deposit only” stamps on all incoming checks, require two signatures on checks above a specified dollar amount and avoid using a signature stamp. Also, be alert to new vendors as billing-scheme embezzlers set up and make payments to fictitious vendors, usually mailed to a P.O. Box.
Internal control programs should be monitored and revised on a consistent basis to ensure they are effective and current with technological and other advances.
- Monitor Vacation Balances. You might be impressed by the employees who haven’t missed a day of work in years. While these may sound like loyal employees, it could be a sign that these employees have something to hide and are worried that someone will detect their fraud if they were out of the office for a period of time. Make sure that all employees periodically take paid time off…you may be amazed at what is discovered while others are doing their work.
- Consult Experts. Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in Financial Forensics (CFF) can help you in establishing anti-fraud policies and procedures. These professionals can provide a wide range of services from complete internal control audits and forensic analysis to general and basic consultations. In fact, these services might be provided at little to no cost as a part of your regular audit and tax services.
- Set the Right Tone at the Top. Finally, the importance of setting the proper tone at the top of your organization cannot be over-emphasized when it comes to deterring fraud schemes. If employees see that upper management plays things “fast and loose” and has little regard for following ethical business and financial practices, they are more likely to feel like they are justified in playing fast and loose with the company’s money and assets themselves.
Instead, try to be above reproach with regard to how you manage your business and deal with your employees and vendors. When you set this kind of example at the top of your organization, it can trickle down to your employees as well.
Mike Crabtree has over 20 years’ experience in the commercial construction industry. He is a lifelong Dallas resident, proud graduate of Southern Methodist University, and Corporate Controller with Triune. Triune is a leading, integrated, design-build General Contractor in the Southwest region of the country.
The Punch List is Triune’s proprietary blog for discussing issues and providing insight specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.