Recognize the most common fraud techniques in the construction business, and stop theft before it’s too late.
With the tough economic times, it is not surprising that employee theft and fraud is on the rise. Most of us feel secure that our employees have high standards of integrity, but it only takes one bad apple to create a financial mess. Sadly, most companies stand little chance of collecting the majority of what is stolen. The good news is that most acts of fraud can be easily prevented by establishing simple bookkeeping rules and techniques.
Outlined below are some of the most common techniques that dishonest people use to steal from a large construction company.
A familiar method of theft involves the bookkeeper creating a vendor with a name that closely resembles a vendor that you do business with. For instance, if you buy from Continental Supply, a bank account could be opened for Continental Supply Co. Checks could then be written to Continental Supply to pay fake bills, and those checks could be deposited to the Continental Supply Co., bank account.
The Fake Employee
Setting up a fake employee is usually only pulled off in a larger company where a fake employee could go unnoticed. In this instance, a fake person is set up as an employee, and payroll is issued. This “employee” may even receive bonuses and reimbursed expenses. A proper audit will usually detect this type of fraud, but it occasionally goes undetected.
Employees sometimes type a phony vendor check using a typewriter, ask you to sign it, and then use the typewriter’s correction feature to remove the “pay to” name. The employee enters another name into this area, and once the check clears, he or she will change it back to what it was when you signed the check.
A bookkeeper creates a fake invoice for a copier repair, for instance. This invoice might include the make, model, serial number and description of the work and parts used. This will be presented to you for payment.
A bookkeeper and other employees sometimes join together to steal. With the bookkeeper involved, invoices can be destroyed along with any transaction record. A bank account can be created with a business name that closely resembles yours, allowing them to cash your checks. If your company is called ACME Construction, then the employees could use the name ACME Construction Co. They just add “Co.” to the “pay to” field and cash it.
Credit Card Charges
Much of the fraud we have seen simply involves a bookkeeper purchasing items for personal use on a company credit card. Well-documented cases show employees stealing hundreds of thousands of dollars over the course of years with this method.
Most fraud and theft acts occur when the owners and managers have little interest or knowledge about their accounting systems. Fraud and embezzlement is a serious threat, and management must take it seriously, especially in this economic environment. A company hit extremely hard with theft might not ever recover. By following these steps, you can save your company millions of dollars.
- Use this security checklist to prevent fraud.
- Beware of bookkeepers who insist on doing everything themselves or never want to take vacation time. Embezzlement is usually done by the most trusted employees who have the most autonomy and access to accounting information.
- Do not give any one person full responsibility for all accounting functions.
- Ask your bank and credit card companies to send all correspondence to your home address.
- Require that a purchase order (PO) be used for all purchases.
- Carefully review each bill and check, and look for potentially fraudulent bills.
- Avoid giving employees privileges to sign checks and transfer, wire or withdraw money.
- Use a unique signature style when signing checks.
- Be certain that your check deposit stamps include the words “for deposit only.”
- Examine canceled checks. Look for forged signatures and altered “pay to” entries, and examine the endorsement.
- Reconcile your bank account and credit card statements every month. Study your bank statement for unusual activity.
- Never allow the same person who does the bookkeeping to reconcile the bank account or credit card statements. Also, do not allow the same person who does bookkeeping to perform payroll.
- Study the audit trail provided by your credit card devices and software. Be sure you are the only person with administrative rights to the software.
- Ensure that security is completely activated in your accounting software, and use strong passwords.
- Make sure your bookkeeper takes at least one week of vacation every year.
- Perform background and credit checks on all employees before hiring them, and continue performing credit checks regularly.
- Hire a professional outside auditing firm to conduct an audit on your company’s books each year.
- Get advice from your CPA.
Did you know?
Embezzlement is usually done by the most trusted employees who have the most autonomy and access to accounting information (such as the bookkeeper).
Construction Business Owner, December 2011