Understanding the Profile of a Fraudster

“I didn’t think fraud would happen to me—I have the best employees,” is a phrase I hear all too often when I meet a new client. Unfortunately, fraud is a real and ever-present threat to business.

While no business is immune to the potential for insider fraud, unfortunately, the construction industry is one of the most at-risk. It could be argued that one of the reasons for this is that employees are working without a high degree of oversight: alone at the office while the boss is away or alone at the construction site. No matter the theory as to why, the fact is, the average fraud scheme costs construction businesses $227,000 before it is discovered.

Employee fraud can occur in any position, from office administrator to project manager to construction executive. Externally, employers may be victims of fraudulent subcontractors, vendors, clients or even partners. Beyond the financial costs, defrauded employers often feel helpless and betrayed by the broken trust.

Nearly 50 years ago, renowned penologist, sociologist, and criminologist Donald Cressey defined The Fraud Triangle:  the three categories that explain the reasoning behind an employee’s decision to commit workplace fraud. The Fraud Triangle consists of three components, which combined lead to fraudulent behavior:

1. A personal, nonshareable financial pressure
2. The opportunity to abuse their position to steal from their employers
3. The ability to rationalize that their actions will not be detected and that the theft will solve their financial issues in secret   

Because there is no way anyone can control an individual’s financial pressure or his/her ability to justify his/her theft, the only way for insider fraud to be prevented is to implement internal controls and appropriate oversight that will reduce the opportunity for it to occur.

The following are internal controls that can help prevent construction loss, both in-house and externally.

In-House

1. Conduct a credit check and criminal history before offering employment to new workers.
2. Segregate job duties across several people. In general, avoid having one person responsible for receiving materials and approving payments; and avoid having one person in charge of billing and depositing funds to the bank. Separating responsibilities reduces the risk of asset misappropriation, the most common type of occupational fraud.
3. Encourage whistleblowing. Construction business owners should foster a culture of honesty and accountability and ethically conduct their business. Part of this includes reassuring employees that if they see something, they should say something, without fear of retribution. Given that a tip most often detects fraud, this is one of the best defenses against fraud.
4. Don’t be afraid to go old school. One of the easiest ways to stop fraud before it escalates is to review bank statements and cancelled check images. The same goes for a review of credit card statements and payroll reports.
5. Make sure the company carries employee dishonesty coverage of at least $100,000 to provide a safety net in case of fraud. 

External

1. Segregate subcontractor selection from subcontractor approval to ensure that more than one person is reviewing estimates and approving bids.
2. Require at least three bids before approving a purchase to avoid the likelihood of collusion, bribery or kickbacks, some of the more common construction fraud schemes.
3. Conduct a financial and criminal background check before agreeing to any subcontractor, supplier or vendor, including a review of their credit history, financial records and to verify its solvency.
4. Require surety bonds for more extensive projects to guarantee payments to suppliers, and make sure the bonds are valid by having a surety agent review them.
5. Conduct side-by-side comparisons of the actual pricing and the original bid, with an eye toward spotting outrageous overages or discrepancies.
6. Go over change orders with a fine-tooth comb to understand the why the original contract was deviated from. Another best practice: ensuring two people review and approve any change order.

Internal control processes can vary from business to business depending on size or resources. No matter the size, however, the bottom line is that no single individual should have sole oversight of an entire process. If fraud is suspected, consult a forensic accountant to conduct a thorough financial review. He/she can help identify damages, qualify loss and restore peace of mind.