According to the most recent Report to the Nations issued biennially by the Association of Certified Fraud Examiners (ACFE), fraud within the construction industry as a percentage of total reported fraud cases has shown a downward trend from 4.3% in 2010 to 3.1% in 2014. While this is a positive sign for the construction industry, contractors inherently face fraud risks due to the nature of the industry. This is primarily a result of the competitive bidding processes, concentrated control by key decision-makers, and lack of appropriate segregation of duties within the organization. The most common forms of fraud that appear within the construction industry are:
Common Forms of Fraud in the Construction Industry
Bribery/Corruption - presents itself both internally and externally as collusion among employees or as part of the bidding process through bid-rigging, in addition to falsification of change orders
Billing - opportunities for employees to create fictitious vendors and make payment on false invoices
Check Tampering - various types of check fraud, including altered payee and forged maker schemes
Expense Reporting - claims for reimbursement of fictitious or overstated expenses
Construction contractors must stay vigilant in order to continue to mitigate fraud risks within their organization by continuing to educate employees and strengthening the organization’s internal controls. While maintaining strong internal controls is important for all organizations, the construction industry is particularly sensitive, since the median loss suffered because of fraud tends to be much larger.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.