Business News and Notes
Content provided by the accounting firm of Dorfmann-Robbie specializing in construction accounting.

An Outside Job - by Mike Smith

Some of the largest losses from construction fraud do not involve inflated expense reimbursements, fake or "ghost" employees or tools and equipment theft. Outside criminals may prey on dishonest key employees at job sites to steal from unwitting construction companies.

Due to budget constraints, internal controls on most construction projects are weak and traditional segregation of duties, that is typically used to reduce fraud risk, is not possible. Often the same employee who orders materials is the same person who authorizes the payment. The construction company's accounting personnel usually rely solely on the key employee's signature as approval for payment of a particular invoice. Since ordering and approval reside with one key employee, that employee has the ability to defraud the construction company by hiding or manipulating cost reports and records. Having a person on the outside, such as an unscrupulous vendor or subcontractor, can make it easier for the key employee to commit fraud, since cooperation from other employees is not needed.

The following is a sample of "outsiders" and the related schemes that potentially could occur on construction projects.

The Imitator

The imitator keeps tabs on small specialty contractors in their area. When they hear about the downfall of a contracting business or the death or retirement of the owner, they may attempt to assume the company's identity. Usually for a short period before the home office of the construction company is aware, the imitator sends bogus invoices to the construction company (with the assumed company's letterhead). The key job-site employee approves and signs off on the fake invoices. The home office of the construction company pays the invoices since it had the proper sign-offs and approvals, and the key employee and the imitator split the ill-gotten booty.

The Scrap Man

Certain projects may require large amounts of wire or piping, both made from copper. Copper is a valuable commodity and is easily sold as scrap. The Scrap Man, who is in the wrecking, scrap or junkyard business cooperates with the key job-site employee. The key employee purchases more electrical wire or copper pipe (or another item that is valuable as scrap) than is needed for the project and hides it in his cost report. The excess wire or pipe is then sold to the scrap man for cash. The cash never makes it to the construction company's books and the scrap man sells the copper for a profit to be recycled and used again. There is a similar scheme involving renovation projects, which usually involve demolition of valuable scrap-metal.

The Mechanic

Construction projects that have a large budget for equipment may employ an outside mechanic or company to maintain and repair equipment. Collusion between a key job-site employee and the outside mechanic might involve submitting phony invoices for parts or equipment repair. Again, all the key job-site employee has to do is approve the fake invoice and split the money with the mechanic. The key employee costs these invoices to the equipment budget or another large budgeted area on the job.

Some of these schemes are difficult to detect. If the schemes are detected the loss to a construction company can be great and will most likely not be recoverable.
If any of the above schemes have "struck a cord" and you feel your construction company may be vulnerable or may have been a victim of fraud, we are available to discuss the situation with you.