Certain industries, like construction, have a more hazardous risk profile than others. Yet entrepreneurs work in these industries because of their passion for the trade and the notion that with greater risk comes the opportunity for greater reward.
This passion drives success; however, recognizing and managing inherent business risks is equally important and should not be lost in the shuffle.
CONSTRUCTION FRAUD DATA
According to a 2016 Association of Certified Fraud Examiners (ACFE) report, construction firms were involved in 3.9 percent of fraud cases reported by ACFE members, making the construction industry eighth among 23 industries in the study. This ranking represents an increase from the 2014 report, which placed construction 12th at 3.1 percent. When measured by median loss, construction ranked sixth out of 23 industries at an average of $259,000 per reported occurrence.
Fraud prevention and investigation professionals consider fraud risk on two planes: Fraud that has the potential to happen with great frequency and fraud that has the potential to have great magnitude. Unfortunately for the construction industry, great frequency and magnitude are consistent attributes of the industry’s risk profile.
But there is good news. The ACFE report also focuses on prevention and detection techniques, providing data on the most effective controls and processes. The report derives the effectiveness of a control by comparing the size and duration of a fraud scheme in cases where the control was present to cases where the control was not present. The inference is that while the control did not stop the fraud from starting, it did play a significant part in reducing the magnitude or duration of the fraud.
Of the 18 controls listed, the link among those at or near the top of the list is that they are all controls designed specifically to look for fraud and errors. Among them are proactive data monitoring/analysis, management review, hotlines, surprise audits and job rotation/mandatory vacation. These controls have routinely been at the top of this list in previous ACFE reports. The purpose of each control is to provide independent input and analysis with the intent of identifying—or, in the case of hotlines, communicating—fraud or errors.
Keep in mind that these controls are not the routine checks and balances used to usher transactions through the accounting process. Those controls serve a purpose, but cannot be relied on to prevent fraud.
COMMUNICATION IS KEY
Fraud needs to be talked about. It is uncomfortable to think that any colleague could be perpetrating a fraud, so this topic is often not discussed. The reality is that this is too big of a risk to brush under the rug.
Employees are in the best position to identify an ongoing fraud from one of their colleagues. Maintaining an ongoing discussion about fraud will not only help remove the awkwardness, but it also will provide critical training to unlock a powerful fraud detection resource. An anti-fraud attitude should be an integral part of the corporate culture and message from the top.
EFFECTIVE REPORTING IS THE OTHER KEY
Once employees have been trained, the final piece of the puzzle is to provide an outlet for reporting fraudulent activity. Hotlines and tiplines continue to be the most frequent way ongoing fraud schemes are discovered, and employees are far and away the top source of these tips at 51.5 percent. Hotlines can be a phone, email or an online service. Choose one that works for the company’s culture.
Safeguarding assets from fraud is an important objective for every company. It will take an all-hands-on-deck approach to be successful, and it starts at the top.