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FRAUD IN THE CONSTRUCTION INDUSTRY

Joel Bobo, CPAHORNE LLP

September 23, 2014

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HORNE LLP

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HORNE’s Construction Practice

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FRAUD IS

…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

What is Fraud?

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…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

…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

What are Internal Controls?

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Fraud can happen inside the company, but often occurs outside the company in the following situations:

• subcontractors• lending organizations• suppliers and vendors

An example is the Target IT breach.• 100,000,000 Target customers affected• $200,000,000 in bank losses

IT risks may be the largest risk area

construction companies have today, and

most don’t even know about it.

Where Does Fraud Occur?

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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.

• This often is discovered by accident.

Management must set a good example and avoid unethical or fraudulent behavior.

• Cutting corners, improper billing, tax cheating, etc.• Also consider the impact on morale of lavish spending: cars, boats,

airplanes, casinos.

Create a whistleblower policy to allow concerns around fraudulent behavior to be raised in confidence.

• Over 50% of frauds caught in business are from whistleblowers.

Internal Controls and Fraud

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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.

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.

Jobsite Controls

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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

Other Effective Fraud Controls

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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.

Jobsite Controls

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Limit equipment repairs and control shop costs• Budget repairs• Run the shop like a business• Consider outsourcing

Implement a fuel management system• Calculate gas mileage for each vehicle• Use GPS vehicle and tank technology• Use GPS, cameras and other tracking technology

Miscellaneous Other Items

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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?

Miscellaneous Other Items

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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.

Analysis and Reports

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$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

$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

War Stories

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QUESTIONS?

Joel Bobo, CPAHORNE LLP

Joel.bobo@horne-llp.com601-326-1332

Contact Information

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Joel K. Bobo CPA

Partner

1020 Highland Colony Parkway

Suite 400Ridgeland, MS 39157

Main: 601.326.1000Direct: 601.326.1332

Fax: 601.898.9054joel.bobo@horne-llp.com

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.

Professional Affiliations• American Institute of Certified Public Accountants• Construction Industry CPAs/Consultants Association, Past President• Mississippi Society of Public Accountants• Louisiana Society of Certified Public Accountants Industry Affiliations• 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, CPA