The schemes outlined below are examples that range from actions committed by one person to more complex activities that involve two or more people.
Tool theft – Hand tools may disappear from jobsites and be reported as lost. These tools may be taken by employees for their personal use and potentially their own small businesses if they moonlight on the side.
Materials waste – Excessive materials as well as nonproject materials may be ordered and diverted for personal use and ultimately reported as stolen.
Products substitution – Inferior grades of materials may be ordered if purchase orders are not matched to receipts.
Duplicate payments – Two checks may be written to the same payee and the fraudster may decide to endorse the second check over to the fraudster or to a third party. The payee of the second check is recorded in the general ledger but is not the actual recipient of the check. Alternatively, two payments may be received by the vendor on the same invoice.
Fictitious vendors and shell company invoicing – Payments may be authorized and sent to a post office box or a non-existent address.
Ghost employees – Payroll may include extra hours not worked or hours for a non-existent employee.
Vehicle and equipment maintenance – Without proper systems in place, a service provider may unknowingly receive payment from a construction company for work done on a nonbusiness vehicle or parts may be ordered for nonbusiness reasons.
Offsite work – Services performed at an unauthorized site may include a change order created to falsely identify the cost as project-related.
Bid collusion – Multiple contractors or subcontractors may agree which company will be awarded a job and at what price.
Kickbacks – Payments made “under the table” for favoritism or special deals result in higher costs for the legitimate company.
As has been proven time and again, the tone at the top coupled with a robust prevention and detection program make a world of difference. Strong internal controls, integrity, background checks, codes of ethics, training, tip lines and internal surprise audits—among other company-specific risk strategies—can be put in place to mitigate the conditions ripe for the occurrence of fraud with employees, suppliers and subcontractors, and to secure job sites and equipment.
Marion A. Hecht is managing director of the Valuation and Forensic Services practice in the Arlington, Va., office of Clifton Gunderson LLP. She has more than 20 years of experience investigating predications of fraud and other transactions involving shell companies, multi-tiered organizations and alter-ego entities used to divert assets for unauthorized purposes. The Association of Certified Fraud Examiners’ 2010 “Report to the Nations on Occupational Fraud and Abuse” can be found at www.acfe.com.