Fight Back Against Internal Fraud

Internal fraud drains more than $4.7 trillion annually from global businesses, according to an estimate by the Association of Certified Fraud Examiners (ACFE).

The median loss from internal fraud at companies in the construction industry is $203,000, according to ACFE’s latest Report to the Nations. Construction experiences the fourth largest median losses of any industry (the median loss for all businesses is $117,000).

Although companies can experience pilferage from customers, vendors and other sources, employees account for the highest losses, when taking into account offenses such as fraudulent insurance claims, unauthorized time off and theft of proprietary information. Crimes can be as simple as stealing company supplies or as complex as sophisticated financial statement fraud.

More specifically, fraud by managers and key executives generates the highest dollar losses because these employees are in a good position to falsify financial, credential, work-related or test-related documents for personal gain.

Construction companies are more susceptible to corrupt business practices than other industries. This can include bribery and state capture.

What can your company do to prevent theft? The ACFE Report found these measures are effective:

• Improve internal controls. For example, do not allow the same employee to keep books, collect funds, write checks and reconcile bank accounts. Arrange for monthly bank statements to be delivered unopened to the company owner, who should review them for unusual transactions, such as declining deposits and checks to unfamiliar parties.
• Conduct background checks on new employees.
• Arrange for fraud audits by the company’s outside accountants or an internal audit department. CPAs can conduct regular independent internal control studies of cash accounts, bank statements and other items to detect criminal activity. Surprise audits are an effective, yet underutilized, tool in the fight against fraud.
• Be willing to prosecute perpetrators. Some organizations that were victimized by fraud didn’t report the cases to law enforcement because: they were afraid of bad publicity; reached a private settlement; wanted closure; or considered internal punishment sufficient.
• Provide ethics training for employees. Educate staff members about the possible sources of fraud and consequences, such as the loss of jobs, raises and profits.
• Institute anonymous fraud reporting mechanisms, such as hotlines. Fraud is commonly discovered through tips from employees, vendors, customers or other sources. These people are frequently in a position to see violations of company policies or excessive personal spending by colleagues.
• Install workplace surveillance devices. For example, a video camera monitoring a loading dock where theft is suspected.
• Look for behavioral red flags including the perpetrator living beyond his or her means and having financial difficulties. They can also involve an unwillingness to share duties, a “wheeler-dealer” attitude, divorce or family issues, addiction problems, refusal to take vacations and an unusually close association with vendors or customers.

Important Considerations

• Globally, more than two-thirds of all frauds are committed by men. In the United States, men committed an estimated 73% of all frauds.
• Globally, the median loss was also higher when committed by men ($125,000) as compared with women ($100,000).
• Losses tend to rise as the perpetrators’ tenure with the organization increases.
• Small businesses are especially vulnerable because of a lack of basic internal control measures.

— Source: 2022 Report from the Assn. of Certified Fraud Examiners

Examine Workplace Environment

One important factor in whether or not employees steal is their attitudes. Employees who feel they are treated fairly by their company are less likely to commit fraud. Many offenses are committed by people who hold grudges and are looking for revenge.

Take a zero tolerance stand on fraud. With a few basic procedures in place, internal business theft can be significantly reduced — or even eliminated — so your construction business can flourish. Ask your accounting firm for more information.

This article appeared in Walz Group’s April 10, 2023 issue of The Bottom Line e-newsletter, produced by Checkpoint Marketing. This content is for informational purposes only.