Fraud saps up to 10 percent of the construction industry’s annual gross revenue. Inflated bills, faulty contracts, bogus insurance claims, and lax auditing all open doors to fraud, according to officers from Grant Thornton, the international auditing and risk management consultant, which recently conducted an hour-long seminar on what leads to fraud and how companies can try to prevent it.
Schmid and Carol Esselink, Grant Thornton’s economic advisory services manager, laid out 10 prevalent fraud schemes, a good number of which expose deficient forensic rigor in how companies monitor what they are paying for services rendered (or not). These include:
- False application for payment
- Billing for work not performed (such as general contractors subbing out work for a lower rate than what they are billing)
- Subcontractor collusion or conflicts of interest, which often manifests itself in bid rigging, price fixing, phantom hires, and so forth
- Change-order manipulation, which often shows up in improper price reductions for less-expensive work substitutions
- Manipulation of the schedule of values and contingency accounts
- Substituting or removing materials
- Diverting lump-sum charges to time and materials costs
- Diverting purchases and theft of equipment and tools
- Nonpayment of subcontractors and materials suppliers
- False representations, such as using undocumented workers.
Schmid notes that contractors often don’t anticipate the kinds of record keeping that’s needed when costs can’t be determined in advance. To prevent fraud in these situations, companies “need to initiate field-force accounting documentation on a daily basis.”
Schmid and Esselink recommend some basic preventive measures if companies suspect fraud, such as contacting a lawyer, conducting background checks on employees and trade partners, securing a project’s documentation, and conducting “basic tests” to verify suspicions. But all of those moves would be after the fact; the presenters urged companies to have controls to thwart fraud in place before a project begins.
Such controls should include compliance and ethics programs that regulate every aspect of the project. Auditing must be consistent and frequent. But more than anything, the company must project an anti-fraud attitude that starts at the top. “The owner has to be involved,” said Schmid.