Fraud Schemes in the Construction Industry

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Managing a construction company is no easy task. There are often employee and subcontractor management issues, insurance and bonding issues, ongoing project management concerns and the time spent bidding and winning new projects. Given all these responsibilities it’s not surprising that fraud in the construction industry can be easily overlooked or simply missed. The nature of the work is that most assets are located on-site away from corporate offices, which means the company needs to rely on the honesty and integrity of employees and others (which may simply be lacking). Unfortunately, those with whom trust is placed can often be the source of illegal behavior. In order to protect a company, it’s essential to understand the most common fraud schemes. To help clients, prospects and others understand these tactics; Wilson Lewis has provided a summary below.

Common Fraud Tactics:

• Altering Pay Rates – It is common for payroll clerks to change the pay rates of various employees or contractors to a higher amount. When this is done, generally the payroll clerk will receive a kick back or pay off for their participation in the scam. The longer this goes on generally the amount and type of fraud that is committed becomes greater and greater.
• Changing Deposit Records – Sometimes an accounting clerk takes payment received by a customer for themselves but marks the invoice as paid. Beyond this, those responsible for preparing deposits and taking them to the bank may start requesting small amounts of money back from the bank. To avoid detection the fraudster changes the paperwork to reflect the accurate deposit amount. This is a difficult tactic to detect especially if the person making the deposits also reconciles bank statements.
• Payroll Tax Fraud – If a company handles payroll internally then this tactic is unfortunately all too common. In this type of fraud, an accounting professional records payment to the IRS or state department of revenue for employees’ tax withholding and the companies matching amount. Unfortunately they don’t actually make the correct payment rather they funnel the money to themselves.
• Altering Change Orders – In this scheme, an accounting professional or other fraudster may create false change orders that require additional payment to a contractor or subcontractor. Common red flags include change orders missing a scope of work description, excess charges, omission of design specifics in scope description or improper price reduction for work substitution. Generally, these are all signs of trouble.
• Diverting Purchases – If a company has many projects going on at the same time it’s common that tools and materials are ordered directly to the job site. For this reason, it’s essential to ensure the materials the company pays for are actually used as intended. Dishonest professionals may charge new materials or tools to a company’s account but have them delivered to a different project site. It’s also wise to monitor purchase orders to determine if the orders seem excessively high for the scope of the work/project.

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It’s difficult to believe that fraud can happen at any company especially when employees are considered trusted. However, the reality is that it can happen anytime and often for no good reason. This is why it’s essential to have a strong system of internal controls to prevent or limit the opportunity for fraud. If you would like to discuss potential fraud or for an internal controls reviews, Wilson Lewis wants to help. For additional information call us at 770-476-1004, or click here to contact us. We look forward to speaking with you soon.