Make Deep Cuts Into Your Construction Company’s Cost of Fraud

It started with a corporate card and a bottle of Coke.

Hot, thirsty, and waiting in line at the local branch of a major hardware chain, Paul saw the refrigerator full of soft drinks. Company policy dictated that Paul use the corporate card for supplies and pay for the soda out of his own pocket. But who’s going to notice $2.50 on a $147.53 receipt?

Especially, he realized, if the receipt got messed up at the job site.

Understanding The Construction Company’s Outsized Share in a $4.7 Trillion Problem

The Association of Certified Fraud Examiners (ACFE) estimates that the typical organization loses 5% of its annual revenue to fraud. Worldwide, employee fraud costs more than $4.7 trillion. The median average loss among construction companies was $250,000 per reported incident. (Per reported incident, Paul’s Coke wouldn’t count.) More than all but three other industries.

For fraud to occur, three factors must be present: The employee generally feels financial pressure and can rationalize theft. But at the top of the so-called Fraud Triangle, there’s opportunity. Where there’s a lack of internal controls, employees take advantage.

And there’s plenty of opportunity in the construction industry, where the size and scope of most projects make it almost impossible to maintain adequate controls. In such an environment, that bottle of soda can be the first step down a rabbit hole that includes:

• Expense fraud: Including mischaracterized, overstated, and fictitious expenses
• Material theft: Stealing materials, tools, and equipment for personal use or resale
• Payroll fraud: Including phony workers and overstating hours worked
• Services theft: Charging personal projects to a job
• Fictitious vendors: Setting up a bogus company and sending invoices
• Product substitution: You pay for a high-quality product but receive something less useful
• Corruption: Including bribery, conflicts of interest, extortion—any use of title or position for personal gain
• Check tampering: Altering payees, amounts, forging signatures
• Petty cash theft: It disappears from the lockbox but isn’t accounted for

It’s Easier to Deter and Prevent Fraud than It Is to Detect It

As we said earlier, fraud happens when a lack of internal controls creates the opportunity for fraudsters to take advantage. Effective internal controls for construction companies include:

• A culture of honesty and integrity: This starts at the top. If employees think their bosses are honest, they’ll feel less likely to cheat their company.
• Segregation of duties: For instance, the same person who authorizes transactions shouldn’t also record them; the person who reviews and reconciles bank statements shouldn’t be the same one who writes checks, makes deposits, etc.
• Timely bank reconciliations and reviews: Ideally, the owner or CFO, someone not involved in day-to-day transactions, should receive and review bank statements and ensure the reconciliations are performed soon after receipt.
• Close out the month’s books quickly: Require your finance people to deliver timely, detailed monthly financial statements and review them closely.
• Job rotations and mandatory vacations: All too often, fraudsters appear to be the most dedicated and hardworking employees. 
• Multi-layer approval processes:  Transactions above appropriate dollar limits should require multiple authorizations and approvals.
• Secure records: Keep blank checks in locked cabinets; password-protect computer files, etc. 
• Physical security: Surveillance cameras to monitor materials, tools, and equipment have a substantial deterrent effect.
• Employee training and awareness: Educate employees about your policies, the importance of fraud prevention, and the proper use of expense management tools.  

Though there’s no sure-fire, all-in-one solution to eliminating fraud, having solid controls in place can minimize opportunities and, thus, fraud.

How 2024 Payments Systems Help Deter, Prevent, and Detect Fraud

Today’s payment systems use robust software stacks to streamline processes, improve oversight, and reduce the opportunities for fraudulent activities. Functions that make a difference include:

• Real-time spend tracking:  Helps you identify anomalies and unauthorized transactions before they evolve into a pattern
• Suspicious activity alerts: Tells you when immediate investigation or action is needed
• Enhanced visibility: Detailed reports and dashboards help you monitor spending patterns, detect irregularities, and ensure compliance with company policies
• Mobile receipt capture: Requires employees to photograph and submit receipts in a narrow window before they can get lost or damaged
• Automated policy enforcement: Lets you program predefined rules and limits into corporate card and vendor payment systems
• Multi-layer approval systems: By giving no single individual unchecked control over financial transactions, you minimize opportunities for fraudulent behavior
• Digital document storage: Eliminates the risk of manipulated or lost paperwork and keeps secure digital records, ensuring accuracy and accountability and making it easier to audit and verify expenses.
• Secure payment methods: Adopting secure payment methods, such as virtual credit cards or electronic funds transfers, can reduce the risk of check tampering and other forms of payment fraud.
• Integration with accounting and ERP systems: Ensures seamless data flow and enhances the accuracy of financial records, helping to identify discrepancies promptly and maintain up-to-date records for audits and reviews.

For more than ten years, PEX has been the go-to for construction companies and contractors who need to spend money in the field yet prevent fraud. Today, owing to an expanded portfolio of products and software integrations, you can deploy our entire payment stack to help prevent and detect fraud. See how we can tailor a solution to your needs with a customized free demo.