FRAUD IN THE CONSTRUCTION INDUSTRY. Joel Bobo, CPA HORNE LLP. September 23, 2014. HORNE LLP. HORNE’s Construction Practice. What is Fraud?. FRAUD IS …wrongful or criminal deception intended to result in financial or personal gain.
Joel Bobo, CPAHORNE LLP
September 23, 2014
…wrongful or criminal deception intended to result in financial or personal gain.
…a person or thing intended to deceive others, typically by unjustifiably claiming or being credited with accomplishments or qualities.
…the act of using dishonest methods to take something valuable from another person
…internal controls are generally put into place after the following have been analyzed:
control environment – integrity, commitment, competency and management philosophy
risk assessment – what level of risk is present
control activities – segregation of duties, proper authorization of transactions and IT passwords
…systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to:
conduct its business in an orderly and timely manner
safeguard its asserts and resources
deter and detect errors, fraud, and theft
ensure accuracy and completeness of accounting data
produce reliable and timely financial and management information
ensure adherence to its policies and plans
Fraud can happen inside the company, but often occurs outside the company in the following situations:
An example is the Target IT breach.
IT risks may be the largest risk area
construction companies have today, and
most don’t even know about it.
In construction companies, jobsite, plant site and job management-related fraud is more common than accounting and financial fraud.
Most fraudsters only take action after discovering an opportunity due to a weakness in internal control.
Management must set a good example and avoid unethical or fraudulent behavior.
Create a whistleblower policy to allow concerns around fraudulent behavior to be raised in confidence.
Look for lower grade materials that may be substituted for the higher grade bid materials.
Job loss/poor performance at jobs should be scrutinized.
Reconcile jobsite delivery tickets to purchase orders.
Fuel tanks on jobsites should require a ticket system.
Monthly reconciliation of job billings and job costs to the general ledger should be required.
Job material quantities should be compared to previously completed jobs to monitor significant variances. Scrap materials should be safeguarded and sale should be monitored.
Compare actual costs to budget on a line item basis
Reconcile payments to pay applications
Track changes to the schedule of values
Track changes to the contingency account
Compare change order signature dates to the actual time in which the work was completed
Send supplier confirmations
Prove reimbursable changes
Tie subcontractor bill to payment applications
Jobsite labor must be reported daily. Implement a fingerprint sign-in system or employee timecards.
Equipment usage at jobsites needs to be monitored via hour meters and daily reports.
Jobsite cameras are recommended.
Limit equipment repairs and control shop costs
Implement a fuel management system
Prepare 3-year schedule of subcontractors used - sort by estimator project manager and look for trends
Prepare monthly bid spread and fade gain analysis considering bonus for best performance
Be skeptical of subcontractor quotes that are significantly lower than others. Desperate for cash flow?
Fade/gain profit analysis schedule should be sorted by time, estimator, type, customer, etc.
Contract cost budget analysis schedule should compare actual to original bid budget and compare material quantities bids to quantities actually purchased. Investigate any large variances.
Contract cash flow analysis report should be sorted by project manager and utilized in a bonus program.
Other analytical reports should include bid spread analysis, labor ratios and benchmarks, and equipment utilization.
All of these reports need to be completed in a timely manner, or damage control will be limited.
$250,000 re-sale split between shop foreman and diesel truck driver after foreman signed for delivery in excess of actual
Asphalt plant scale operator allowed friends to use scale and take materials
Controller paid monthly credit card statement with electronic transfer of company funds
Payable clerk produced duplicate copies of signed checks and deposited into fake accounts
Job foreman ordered extra rebar and sold to scrap dealer
$1 million in kickbacks paid to truck manager and CFO for extra hauling over 5-year period
$200,000 stolen when job superintendent submitted hours for terminated employees over a three-year job
$100,000 stolen when electrical contractor foreman ordered extra copper and resold to dealer
Estimator leaked bid amounts needed and gained various items as a result
Payroll clerk cut two checks to herself each week; owner signed without realizing
Joel is an assurance partner and the firmwide industry director for construction. Joel provides assurance and advisory services to large privately owned companies. He serves on HORNE’s Board of Directors and also serves as financial advisor to several boards across the state.
Joel joined HORNE in 1992 and has more than 25 years of public accounting experience providing assurance and advisory services to clients, including specific knowledge of construction, non-profits and small businesses. Joel began his career with a large regional accounting firm.
Joel earned a Bachelor of Accountancy from the University of Mississippi.
American Institute of Certified Public Accountants
Construction Industry CPAs/Consultants Association, Past President
Mississippi Society of Public Accountants
Louisiana Society of Certified Public Accountants
Mississippi Roadbuilders Association
Mississippi Association of Builders and Contractors
Mississippi Associated General Contractors
Mississippi Chapter of Construction Financial Management Association
Mississippi American Subcontractors Association
Surety Association of Mississippi
Joel K. Bobo
Ridgeland, MS 39157