Content provided by the accounting firm of Dorfmann-Robbie specializing in construction accounting.
An Outside Job - by Mike Smith
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
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
The following is a sample
of "outsiders" and the related
schemes that potentially could occur on construction projects.
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.
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