It seems wherever I look in Northeast Florida these days I see some construction project. New homes in St. Johns County, Development in the Downtown district and redevelopment of commercial spaces is commonplace here. Naturally the eternal pessimist in me focused on how much fraud is happening around us. Doesn’t everybody?
Construction fraud involves many schemes and perpetrators. Educating oneself against the types of fraud prevalent in construction can save potential victims money and time. According to a global fraud study by the Association of Certified Fraud Examiners (ACFE), the median loss in more than 40 construction fraud cases examined was $245,000.
Construction fraud is a form of fraud committed by a construction company or a contractor. This type of fraud can include performing substandard repairs or cheating another party involved in the construction project such as the client. Construction companies are also potentially subject to fraud by internal employees committing fraudulent actions.
The below examples represent just some of the fraud schemes that take place in the industry:
A fraudulent scheme in procurement auctions resulting in non-competitive bids and can be performed by corrupt officials, by firms in an orchestrated act of collusion, or between officials and firms. Subcontractors may work to rig bids and fix prices. Kickbacks and bribes are commonplace in this scheme;
A party creates invoices at inflated rates or for substandard products, sometimes note delivered, and charges the party more than the actual costs. Examples include lower grade materials being used in place of the quoted items; and
A contractor bills for a lump sum and submits an invoice for material and time that was already in the initial budget.
While consumers are victim’s construction companies can also be affected by fraud. Most of these companies and contractors that they work with do not have the resources to monitor or prevent fraudulent actions. And when the money is rolling in management/owners can lose sight of certain employee actions. Some examples include:
A company bookkeeper creates a fake vendor and processes payment for work not performed or materials not received. Companies with a high volume of vendors or payments are more likely to be affected by this type of scheme;
A ghost employee is just what it sounds like, an employee who does not exist. The scheme is similar to fake vendors. I have also seen this happen in multiowner situations when one partner looks to extract profits from other partners in illegal fashion;
Employees submit time cards not capturing true time and no oversite or audit is performed to ensure that the company is compensating employees or subcontractors for work actually performed; and
Misapplied Payment Receipts
Wherein accounts receivable is written off and payment is sent to either a fake vendor or a vendor who is in collusion with the employee providing payment.
The unfortunate truth is that when the economy is “ticking” fraudsters will take advantage of internal control breakdowns to find ways to meet their pressures and rationalizations. While we cannot put a stop to these pressures and rationalizations companies, consumers and government contracting authorities can employ internal controls to prevent or detect such fraudulent schemes. Some of the best, and most resourceful controls in my experience, include owners reviewing bank and credit card statements on a monthly basis, implementing formal policies and procedures asking employees, vendors and affiliated parties to acknowledge their compliance with them and providing anti-fraud education and a “whistleblower” or “open door” policy.
While Northeast Florida is undergoing exciting times, we must learn from the lessons are fellow neighbors in Southern Florida and other growing areas of the Country went through during construction boom times. The one constant I have learned in my experience is that when money is flowing, fraudsters will construct fraudulent schemes to enrich themselves. Josh Shilts