While external fraud like identity theft and phishing scams are common concerns, internal theft — or occupational fraud — within an organization can be equally as damaging. This article delves into the various forms of internal fraud, providing insights to help you safeguard your company.
Occupational Fraud in Construction
The Association of Certified Fraud Examiners (ACFE) conducts a biannual global fraud survey and asks Certified Fraud Examiners (CFEs) to provide information about the single largest occupational fraud case they had investigated that met specific criteria.
The most recent survey, Occupational Fraud 2022: A Report to the Nations, studied cases from January 2020 through September 2021, which included ones that started prior to the pandemic.
CFEs estimate that organizations lose 5% of revenue to fraud each year on average. According to the survey, the construction industry is one of the top five industries in occupational fraud loss, with a median loss of $203,000 per fraud incident.1
Participants were also asked whether pandemic-related issues contributed to the fraud cases they investigated, in which 52% of respondents noted that at least one factor had contributed to occupational fraud.2
It is also expected that there will be an increase in these numbers in the 2024 study.3
Cash Flow
One facilitator to occupational fraud is cash flow. In 2020 and 2021, cash was pumped into the economy as a result of the pandemic — to businesses through the Paycheck Protection Program, Economic Injury Disaster Loan, state, and local grants and to individuals through unemployment assistance.4
The extra cash flow allowed businesses and individuals to spend without any slowdowns to construction industry backlog. With an abundance of cash, sales remained strong, and businesses were doing everything they could to remain open due to the uncertainty of the pandemic. And, due to this, control procedures may have softened, ultimately allowing for the opportunity for theft.
Team Size
In smaller construction companies, the accounting team is often comprised of one person. Business is fast paced, can be complex, and could include transactions that may not always be properly documented but rather agreed upon by a handshake.
Even if a company’s accounting department has two or three people, business may be moving at a fast speed, which can also lead to oversight.
Why Fraud Exists
The fraud triangle, developed by Dr. Donald Cressey, hypothesizes that if three components are present — pressure, rationalization, and opportunity — a person is likely to pursue fraudulent activities.5
Pressure
Financial pressure could be coming from any number of sources, from attempting to keep up with friends’ or family members’ lifestyles, a costly health issue, job loss within the household, addiction to a substance or activity, or just general overspending.
Rationalization
A fraudster will rationalize their behavior with reasoning, such as feeling underpaid, thinking the amount taken is a drop in the bucket to the company or its owners, intending to repay the amount taken, etc.
When money was abundant during the pandemic with government subsidies, if a company or other executive spent more lavishly than they had before, then employees could potentially rationalize committing fraud by thinking, “Upper management was doing it, so I can do it too.”
Opportunity
Company policies and procedures and culture must provide an opportunity for the theft to occur. Appropriate checks and balances should be in place to ensure that no one person can commit and conceal a theft.
An organization with a lax culture is more likely to be a victim to occupational fraud than one with clear expectations and accountability for all employees.
Common Examples of Internal Fraud in Construction
The following are some examples of common internal construction industry fraud:
Time Clock Manipulation
Employees may intentionally or unintentionally take advantage of a lack of clarity in timekeeping policies and procedures.
For example, does the time clock start when the employee leaves the house or steps foot on the jobsite? Does the time clock stop when the employee finishes work for the day or after they arrive home? Falsified time clocks can also put an employee into overtime pay.
The time clock policy must be very specific and communicated clearly in the employee handbook, as each company may view these processes differently.
For example, a construction company had identified an increase in overtime pay across the company. When they reviewed time clocks, they learned employees were starting their tracker when they left their house each day and stopping it when they got home. However, the employee handbook stated that the time clock started when the employee arrived onsite and finished when they left the jobsite each day.
The supervisors had not been adequately reviewing and approving time clocks, so the employees continued with what they thought was the correct approach.
Preventing Time Clock Fraud
Data analysis to identify timekeeping abnormalities may include comparing clock ins and outs for similar positions by job, comparing total time by position or job, or comparing overtime across the whole company.
Payroll Fraud
Payroll fraud comes in many forms and is very common. One such type of fraud is called a ghost employee, resulting from inadequate reviews of detailed payroll reports. A ghost employee is a person who is on an employer’s payroll but does not actually work for the company. This can be an employee’s family member or an employee who used to work for the company but no longer does.
For example, a construction company identified fraud through their payroll process when they noticed an increase in their overall payroll totals without an increase in approved headcount. They found that the bookkeeper had added their children and fake employees to the payroll. It was found that the bookkeeper was receiving the payroll funds for these ghost employees via direct deposit.
Preventing Payroll Fraud
Data analysis to monitor for payroll fraud may include reviewing employee bank accounts to determine if one bank account is receiving multiple payroll checks.
Also, a detailed review of each payroll check at signing could be performed to determine that the employee is still a known current employee.
Corporate Credit Card Fraud
Misuse of corporate purchasing cards is also quite common. Policy and procedural considerations should include:
Does the policy require a full receipt that itemizes exactly what was purchased (e.g., gas receipts and receipts from large suppliers)?
Is the reviewer of purchases made via corporate card instructed to identify potential personal purchases such as food or personal use items that are not relevant to the purchasing employee’s job responsibilities?
How is it determined whether those types of expenses are personal or if they should be part of the employee’s responsibilities?
One case was identified where an employee was filling up gas multiple times a week, but particularly on Friday, for multiple vehicles. The company had a fuel tank at their company headquarters that was being fraudulently used for personal use instead of the intended company equipment.
It was uncovered when the accountant was reviewing the increase in fuel costs month-over-month and confirmed through video surveillance that a worker was stealing fuel on the weekend when nobody was looking.
Another case was identified where an office manager was buying excess tools when they were only authorized to purchase a set dollar amount per new employee. The employee was selling the extra tools for cash. This scheme was identified when the owner of the company was reviewing financial statements year-over-year and noticed that there was a large increase in tool purchases, yet the additional headcount didn’t align with the increased cost.
Preventing Corporate Credit Card Fraud
Data analysis to identify credit card abuse may include comparing spend by an employee’s position, by vendor, or when it’s occurring outside of normal working hours (e.g., nights and weekends) to determine anomalies or unnecessary spending for business.