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SPECIAL SECTION:
CONSTRUCTION ACCOUNTING
O
ne of the largest forfeitures
ever imposed on a
construction company
was handed down to a
prominent New York
City-based building and
interiors rm earlier this year
after the company pled guilty to a
litany of fraud charges, including
client over-billing and falsifying
business records. In addition
to forfeiting $55 million, the
companys former CEO and
chief investment ocer will serve
prison time. Both executives owe
millions of dollars in restitution.
From the C-suite down,
construction operations of
all sizes are not immune to
occupational fraud. Te sheer
complexity of the industry leaves
businesses vulnerable to a litany
of fraud schemes, the majority
of which are not new. However,
organizations can implement anti-
fraud controls to limit the risk of
corruption and ensure an eective
compliance program.
Set a No-Tolerance Tone
At the Top
Establishing a fraud-free culture
starts at the top. Employees who
witness superiors modeling ethical
behavior are less likely to engage
in illegal activity. Companies
that maintain ongoing ethics
training and a code of conduct set
a clear benchmark for employee
behavior. An organization
must demonstrate a willingness
to prosecute all ndings of
fraudulent activity and not
disregard certain violations.
Furthermore, when setting
up deterrence programs, an
organization must educate
employees about fraud and how it
hurts the business.
Implement Fraud Reporting
Mechanisms
Overwhelmingly, more fraud
cases are discovered by employee
whistleblowing than by any other
method. Encourage employees
to report illegal or suspicious
behavior condentially. In
addition, encourage anyone
involved in the business cycle,
including customers and
suppliers, to report suspicions of
fraud. Set clear channels for how
and to whom employees may
report unethical activities.
Keep in mind, executives must
rst establish an environment
of trust and accountability. Fear
that management will not take
corrective action or not believe an
employees claim will undermine
the reporting process.
Establish Internal Controls
In a small business structure of
less than 100 employees, a few
trusted people often manage sev-
eral functions. But what happens
BY DAVID ACOSTA
Building a Fraud-Free
Worksite
Companies that maintain ongoing
ethics training and a code of conduct set a
clear benchmark for employee behavior.
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SPECIAL SECTION:
CONSTRUCTION ACCOUNTING
if an unethical employee handles
payroll? Te operation is suscep-
tible to check tampering, fraud-
ulent billing and other nancial
schemes if internal controls are
lacking. When manpower is
limited, owners and managers
need to give closer oversight and
more frequent reconciliation of
potential problems.
Additionally, segregation of
duties ensures no single person
has control over the process,
especially in high-risk areas
such as nance or inventory
operations. For example, separate
the companys deposit functions
from its recordkeeping functions,
or ensure employees who write
checks are not authorized to sign
them. Also consider implementing
procedures for reviewing orders,
variance analysis, computerized
tracking and review of supporting
documentation. Even with
trusted, long-time employees on
the payroll, its important to put
internal control measures in place.
Perform Audits
An audit is paramount to
ensuring business processes and
nancial systems are in order. No
matter the stage of the project
cycle, a construction audit can
help operators meet project goals,
resolve potential problems and
recover lost funds.
External auditing specialists can
help negotiate favorable contracts,
validate contractor compliance,
reconcile project expenditures,
monitor construction closeout
and prevent conicts that may
lead to costly litigation. In
addition to supporting current
activities, an audit will safeguard
future projects.
Other Considerations
Soliciting a high number of bids
decreases the possibility of collu-
sion. Moreover, due diligence in
the bidding process can help dis-
qualify risky contractors. Just as
employee background checks are
an important part of the business,
so too is vendor management.
An eective vendor screening
process ensures suppliers have an
acceptable business reputation
and the appropriate qualications
and licenses.
Understanding why fraud occurs
is as important as understanding
how fraud occurs. Research
conducted by the Association of
Certied Fraud Examiners reveals
the average fraud perpetrator is
generally a rst-time oender with
a spotless record.
Te circumstances of pressure,
opportunity and rationalization
are three basic components that
make up the triangle of fraud and
are present in most fraud cases.
Pressure such as mounting debt,
divorce or unrealistic business
results can motivate a person to
engage in illegal acts. A jobsite with
weak controls or unlimited access
provides the opportunity. Te most
crucial component in the triangle
of fraud is rationalizationthe
fraudsters justication for commit-
ting a crime.
Further studies have found
higher incidences of occupational
fraud among organizations
with high turnover and a lack
of sta training and that ignore
irregularities. Be cautious of
employees who refuse to take
vacation, exhibit on-the-job
behavioral changes, or make
elevated lifestyle purchases such
as a new car, jewelry or other
expensive items. While these
red ags dont always prove
fraudulent activity, they highlight
the potential presence of fraud
and provide managers with an
opportunity to investigate deeper.
From corrupt employees to
unscrupulous vendors, it is
impossible to stamp out fraud in
the construction industry, but the
prosecution of those who commit
fraud has resulted in stricter
practices and tighter controls. By
implementing practical tactics
for recognizing and responding
to fraud, it is possible to mitigate
the risk.
David Acosta is a member of the
American Institute of CPAs Forensic
and Valuation Services Section.
For more information, visit www.
coopercpagroup.com.
Understanding
why fraud occurs
is as important as
understanding how
fraud occurs.

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