Is your company vulnerable to internal fraud?

Steve Cucciero thought he’d done everything right. His contracting firm had expanded from three to 25 employees over the past five years; the projects were now in the low seven-figure category; he’d delegated tasks within his company to maximize efficient use of talent; and the annual profits seemed pretty good. Then his auditor landed a bombshell on his desk; he’d been ripped off, and by one of his managers.

It sounds like a scenario from our ‘What Would You Do?’ Contest. Yet internal fraud is a potential problem for any fast-growing company, especially when the owner is out of the office pitching new business and sowing relationship seeds for the future.

Cucciero (a fictitious contractor) learned the hard way that perpetrators of fraud don’t always fit the stereotypical criminal profile. They might not even be their own employees. In fact, they can be joint venture partners, suppliers, or sub-contractors. Their motivations can be anywhere from pure self-enrichment to dealing with a stressful personal financial crisis.

Construction companies suffer high levels of fraud

“Who? Me?” Those who commit internal fraud don’t necessarily fit the typical criminal profile

According to the U.S. Department of Justice, the construction industry is a prime target for all sorts of fraudulent behavior. The Association of Certified Fraud Examiners confirms this, saying 3.9 per cent of frauds occur in this industry. Although by volume most fraud is committed by those under 35 years of age, older personnel in senior positions also commit fraud, usually with large amounts involved. The victim company often a small to medium-sized business, like Cucciero’s; big enough to be dealing in fairly large sums but too small or growing too fast to have put appropriate safeguards in place.

What are the major fraud issues?

1. Inadequate safeguards to monitor cash management, such as fictitious or inflated expenses, skimming, or altered receipts.
2. Poor purchasing controls that might encourage fake invoices, or the over-purchasing of supplies or inventory.
3. Theft of tools or equipment from the shop or site.
4. Inventory theft of materials for personal use or moonlighting jobs.
5. False time sheets or pay applications.

Internal fraud is not something any company owner wants to think about. Bringing in safeguards or improved financial and control systems has to be done tactfully, so as not to offend trusted employees who have done no wrong. Nevertheless, just as it is a key to any business to delegate responsibilities, it is incumbent for owners to have measures in place to ensure correct behavior.

Just some of the steps you can take
Here are some ideas that might fit within your company’s structure

1. As owner, ask that all bank statements be opened only by you.
2. See that all payment cheques require your signature plus one other, and that the original invoice and company payment application be attached prior to signing.
3. Change orders should be monitored for any excessive amounts, or for areas of work missing from the original contract descriptions. Ask for additional documentation as required.
4. Beware of lump sum expense charges, or the mixing of time and materials into a single amount.
5. Match sub-contractor expenses to the project budget

Most important is for you, the owner, to foster an atmosphere of honest behavior with your employees and your suppliers, and reinforce the point that severe repercussions await those who don’t play fair.

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