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Background
More than ever, companies are looking to their bottom line: How can they achieve greater profit? In a struggling economy, the reality of fraud becomes more prevalent – whether it shows up in corruption/ conflicts of interest, misappropriation of assets, or fraudulent financial statements. Construction businesses must examine their susceptibility to fraud and establish preventive measures to protect their company and their reputation in an increasingly competitive market.
Common instances of fraud include: falsifying records, change order manipulation, submitting invoices with inflated charges, substituting or removing material, misstatement of material and supply quantity, internal embezzlement, defrauding the government of tax credits, duplicate invoices and charges, payments to fictitious vendors (billing for unperformed work), fraudulent arrangements with outside vendors (subcontractor collusion), unauthorized personal purchases, inflated labor rates and overhead, unrecorded collection of payment from customers, bribing government officials to gain lucrative contracts, and property theft.
Implications
Construction company owners and managers must do their part to reduce fraud within their businesses, making sure proper internal control measures are put in place and diligently practiced. Without good internal controls, the impact of fraud to construction companies could entail financial loss, damage to the company’s reputation, litigation, and/or criminal charges.
Client Discussion Points
- How is the construction company promoting a culture of ethical business practice and fraud prevention?
- Does the construction company have a plan to react if fraud is detected? Does the company provide fraud training to all personnel?
- Is the construction company performing detailed audits of records at various levels within the business?
- Where are the weak links in the chain of internal controls? How is the construction company identifying those areas and strengthening them?
- Are employees aware of the construction company’s whistleblower hotline? Do employees feel protected in reporting suspected fraud?
Resources & Commentary
- Grant Thornton (ConstructonBusinessOwner.com): – The Most Common Types of Construction Fraud
- Ernst & Young – Construction Fraud Is on the Rise: How to Mitigate It
- EisnerAmper – Error and Fraud Prevention: Internal Controls Keep a Tight Ship
- Horne – Preventing Fraud by Construction Contractors
- Carr, Riggs & Ingram – Construction’s Top 8 Fraud Schemes
- Bloomberg Businessweek – More Indictments in NYC Construction Fraud Case
- NewsOK – Ex-Norman Businessmen Plead Guilty to Fraud Charge
- Fulbright & Jaworski – JGC Corporation Settles FCPA Charges: DOJ’s Expansive Jurisdictional Reach Results in Stiff Penalties
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