Corruption: Top Fraud Threat to Construction Companies

2024-05-06

Reading time: 2 minutes 20 seconds Fraud is a persistent concern amongst construction companies due to the opportunities for illegal behavior to occur undetected. The size and scope of many projects make it nearly impossible to implement adequate protections. Concerns about bid rigging, billing schemes, equipment/asset theft, larceny, and skimming are just a few ways … Continued

Reading time: 2 minutes 20 seconds

Fraud is a persistent concern amongst construction companies due to the opportunities for illegal behavior to occur undetected. The size and scope of many projects make it nearly impossible to implement adequate protections. Concerns about bid rigging, billing schemes, equipment/asset theft, larceny, and skimming are just a few ways companies are victimized. When creating/optimizing a fraud prevention program, it is necessary to design controls to limit exposure. According to Occupational Fraud 2024: A Report to the Nations, the most common scheme in construction is corruption. It was also found the median average loss was a whopping $250,000 per incident, behind the mining and wholesale industries. These findings provide important insights into where risk management programs should focus. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.

About the Report

The report findings are based on the ACFE 2023 Global Fraud Survey results, an online survey of Certified Fraud Examiners conducted between July and September 2023. Respondents were asked to provide information about the largest fraud case investigated, assuming four criteria were satisfied. This includes the requirement for occupational fraud to have occurred, an investigation conducted between January 2022 and the time of survey participation, the investigation was completed, and there is reasonable certainty the perpetrator was identified. A total of 1,921 cases were analyzed for the 2024 report.

Key Fraud Findings

• Construction Fraud Schemes – The report analyzed the cases to determine the most common schemes by industry. It was found that 52% of fraud cases involved corruption, 38% billing, 25% non-cash fraud, 25% expense reimbursements, 23% skimming, 23% payroll, and 19% check payment tampering. Honorable mentions include cash larceny, cash on hand, and register disbursements. Interestingly, only government, energy, and manufacturing incurred higher losses due to corruption than the construction industry.
• Median Loss Per Incident – There was also interest in understanding the loss associated with these activities. It was found that construction companies experienced a median average loss of $250,000 per incident. This ranks in the top five, which also includes mining ($550,000), wholesale ($361,000), manufacturing ($267,000), and services ($170,000). The high loss amounts underscore the need for effective fraud prevention controls.
• Anti–Fraud Controls – The report also sought to understand what anti-fraud controls were in place at victim organizations. It was discovered that 85% of victims had a code of conduct, 84% external financial statement audits, 80% internal audit departments, 71% reporting hotline, 62% fraud training for managers/employees, 60% anti-fraud policy, and 59% employee support programs. While these controls did not stop fraud, they resulted in quicker detection and lower overall losses.
• Controls & Median Loss – There was interest in understanding how the presence of controls impacted median loss. It was found that surprise audits resulted in the largest reduction in loss by 63%, reporting hotlines 50%, proactive data monitoring 50%, fraud training 47%, internal audit 43%, dedicated fraud function 41%, and employee support programs 39%. Honorable mentions include job rotation/mandatory vacation, independent audit committees, and whistleblower rewards.

Contact Us

Fraud continues to be a challenge plaguing the construction industry. Many controls can be implemented with varying degrees of success. For this reason, it is important to review and update your fraud prevention policies regularly. If you have questions about the information outlined above or need assistance with an internal audit issue, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.