Construction Business Owner, November 2007

Editor’s Note: Following is a continuation of Construction Business Owner’s June article, “Handling Contract and Procurement Fraud,” in which a case study was presented of potential contract and procurement fraud and the ensuing investigation of that allegation. Now learn how to build effective controls and monitoring systems to help prevent and detect that type of behavior in the future.

The Work is Not Over

Recall that in the previous article, we found that West Coast Construction (West Coast) had conducted a thorough investigation of one of its project managers because of allegations of a conflict of interest and bid rigging. Based on the evidence gathered and focused interviews conducted by West Coast during its investigation, the project manager admitted to the conflict and was terminated. However, the recovery of the losses and costs of the investigation had to be borne by West Coast. Unfortunately, the end of a successful investigation does not mean the end of the work that West Coast must perform as a result of the lapses in controls and processes that allowed this incident to occur. A company must turn attention to building a more robust system of anti-fraud programs and controls to mitigate their exposure to this type of behavior in the future and to ensure they have an adequate program in place to respond to future instances of fraud or abuse.

Managing Risk Due to Fraud

An effective fraud risk management system will include a set of programs and controls to prevent and detect fraud supported by a strong process on how to respond should fraud or abuse be detected or come to light. Clearly such a program must be supported by an effective “tone at the top” from senior management team. The tone at the top is extremely important to the overall controls system as it lends weight from the top down to the key message from senior management that this type of behavior will not be tolerated. Tone at the top is not something to just articulate, but it must also be demonstrated through management behavior and actions as being part of the organizational culture.

Let’s take a look at some of the areas where West Coast and others can improve their internal controls and compliance programs:

• Background screening—Including background checks as a normal part of the hiring process can help mitigate the risk that undesirable individuals are employed by the company. Consideration should also be given to conducting background checks on subcontractors as part of the normal due diligence process. In addition, the company should ensure that subcontractors have a good background screening process in place within their own organizations.

• Code of Conduct/Ethics—Creating an employee code of conduct is an effective way to communicate the company’s expectations with respect to appropriate behavior that should be adhered to by all employees in discharging their duties. The code of conduct can also communicate the consequences that employees face if they violate those polices. A common practice is for all employees upon hiring, and annually thereafter, to sign a certification which acknowledges their understanding of the code of conduct and the consequences for violations. It is also worthwhile to consider providing a copy of the code of conduct/ethics to suppliers and subcontractors to ensure that they understand what will be expected of them when supplying products or services to the company. Another good practice is to display the code of conduct on the company’s website enabling customers and vendors, in addition to employees, to view it.  This could help disseminate the code while also providing instructions on how to file a complaint, in the event of allegations of impropriety.

• Conflict of Interest Certification—An important mechanism to impose is to require employees to disclose any potential conflicts of interest. A conflict of interest certification prepared on an annual basis may help the company identify relationships between their employees and customers, vendors and other stakeholders. The certification can highlight potential risks for conflicts that were ultimately identified at West Coast after the investigation was performed.

• Whistleblower Hotline—A whistleblower hotline can be an important tool in gathering information about potential unethical behavior within the organization. There are several attributes that an effective whistleblower hotline process exhibits, including:

  • Accessibility
  • Confidentiality
  • Ability for callers to follow-up on an investigation based on their report

• Internal Audit—An internal audit department, even a single auditor, works to both reinforce the importance of the company’s anti-fraud programs, as well as employs procedures designed to prevent and detect potentially fraudulent behavior. The internal audit function is part of senior management’s tone at the top as discussed before and works to support the message of its intolerance for fraudulent behavior.

• Internal Control Self Assessment—It may be useful for the organization to conduct a control self assessment facilitated by a controls expert to ensure the process delivers maximum results. The purpose of this exercise is to evaluate the vulnerability of the company’s control environment with a view toward identifying weaknesses or potential failures in the internal control structure that may lead to fraudulent behavior.

• Training for Selected Employees – Certain employees are in positions that expose them to a higher risk with respect to fraud and abuse. Consideration should be given to devising training programs to identify and assist them in reacting to potential fraud and abuse red flags.

 

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