The construction industry has made great strides in overcoming the outdated perception that it’s rife with corruption. Unfortunately, the fact remains that contractors lose hundreds of thousands of dollars a year to occupational fraud.
As formally defined by the Association of Certified Fraud Examiners (ACFE), occupational fraud is: “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”
The ACFE’s reporting on the prevalence of fraud is widely read throughout the business world. Let’s review what its latest report says about the construction industry.
Target these vulnerabilities
In the ACFE’s most recent fraud survey — Occupational Fraud 2024: A Report to the Nations — construction ranks fourth in the “Top 5 median losses by industry,” with a median loss of $250,000. Only mining, wholesale trade and manufacturing had higher median losses. The average loss per case across all industries was $1,662,000.
Obviously, it’s tough to stop fraud unless you know where to look. According to the ACFE report, the most common occupational fraud schemes in the construction industry were:
- Corruption, such as bribery or conflicts of interest (52% of cases),
- Billing schemes, where an employee submits invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases (38% of cases),
- Noncash misappropriation, where an employee steals or misuses noncash assets, such as inventory, equipment or confidential customer information (25% of cases),
- Fraudulent expense reimbursements, such as submitting fake receipts or presenting documentation for the same expense more than once (25% of cases), and
- Payroll schemes, where an employee makes false claims for compensation, such as claiming overtime for hours not worked or adding ghost employees to the payroll (23% of cases).
After reading those examples, consider whether and how those crimes or others like them could strike your construction company. Do you have adequate antifraud measures in place, or are there parts of your business vulnerable to wrongdoing?
Rely on internal controls
A strong internal control system is critical to preventing fraud. Common examples include background checks, segregation of duties, dual authorization of sizable payments and management review of major processes. Per the ACFE report, nearly half of reported fraud cases occurred because of either a lack of internal controls (32%) or an override of existing controls (19%). Another 18% were attributable to a lack of management review.
Historically, the ACFE has recommended a variety of antifraud controls as particularly effective in detecting fraud early and minimizing losses. These include:
- Fraud hotlines (the most common detection method),
- Job rotation / mandatory vacations,
- Surprise audits,
- Proactive data monitoring/analysis,
- Antifraud policies,
- Formal fraud risk assessments,
- Antifraud training,
- Codes of conduct, and
- Dedicated fraud departments or functions.
Interestingly, in the 2024 ACFE report, web-based reports were the common fraud-reporting mechanism, coming in at 40%. Email was next at 37%, and good old-fashioned telephone hotlines came in last at 30%.
Stay vigilant
Every construction company’s risk of occupational fraud differs depending on its size, workforce and other factors. However, one thing’s for sure — no construction business is immune from this very significant threat. Be sure to stay vigilant. We can help you assess your fraud risks, strengthen internal controls and undertake other measures to prevent financial wrongdoing.
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