From diverted funds to padded bills, construction firms lose money to fraud perpetrated by employees, contractors, subcontractors, and venture partners each and every day. In fact, the Associated of Certified Fraud Examiners (ACFE) and Dr. Dominic Peltier-Rivest, Ph.D., M.Acc., CFE of Concordia University, Montreal estimated that the median loss to occupational fraud in the Canadian construction industry was just under C$629,000, higher than the global average for all fraud cases. This statistic should come as incredibly alarming, given that construction fraud victims often suffer damage to their reputation and loss of tender opportunities in addition to a significant decrease in morale and productivity levels.
It’s also not uncommon to have civil or criminal actions brought against your construction company as a result. Your business can’t afford to incur penalties for violating industry standards, project delays or cancellations, or legal action as a result of occupational fraud during these times of uncertainty. Instead, with the Canadian construction industry at an all-time high and the potential for loss on multiple fronts, it’s time for the industry leaders to step up and take action. Today’s brief editorial dives deeper into the subject, including how to detect and prevent fraud in your company. For a legal team that can help you initiate anti-fraud initiatives and protect your business in the event of fraud, look no further than the Toronto construction law attorneys at Cotney Canada.
Common Types of Construction Fraud
Occupational fraud occurs when an employee uses their position within the organization to misuse said organization’s assets or resources for deliberate and personal gain. This type of fraud can take place on all levels within the organization, from contractors to managers to executives to owners; however, it almost always involves one or more individuals seeking personal gain. The financial and reputational damage resulting from fraud also escalates with seniority.
Many types of construction-fraud related schemes exist, but some of the most common schemes are outlined below:
- Non-payment of subcontractors and material suppliers: This type of fraud is executed primarily by delaying or falsifying lien waivers, or using project cash receipts in order to pay bills for other projects.
- Manipulation of the schedule of values (SOV) and contingency accounts: Failure to update the schedule of values line items as changes are made can easily provide opportunities to cover fraud like charging phony bills, hiding cost overruns, or using a contingency to cover non-reimbursable costs.
- Inventory or Asset Misappropriation: This occurs when the tools and equipment allocated for your project are being used for a subcontractor’s personal use.
- False Representations: The majority of contracts require specific terms about the subcontractor’s employees, insurance, purchases, and more. False representations may include using undocumented workers, falsifying minority content reports, or failing to comply with environmental regulations.
Other types of construction fraud include accounting and payroll fraud, secret commissions or kickbacks, falsified payment applications, and manipulation of change orders, just to name a few. If your company has fallen prey to any of these construction-fraud related schemes, don’t wait any longer to contact a Toronto construction law attorney with Cotney Canada.
Detecting Construction Fraud
Despite the frequency at which construction fraud occurs, it can be incredibly difficult to detect. For occupational fraud in Canada, tips were by far the most frequent method of detection (nearly 43 percent of all cases), followed only by internal controls, accident, internal audit, external audit, and police notification. This statistic brings new light to some of the audit committee regulations adopted by Canadian provinces in the last couple of years, which require audit committees of publicly traded companies to establish reporting mechanisms to receive and address tips regarding internal controls and financial matters of the company. Likewise, the nearly 16.7 percent of fraud cases that were detected by accident demonstrate a heightened need for additional audit tests to detect and investigate incidents of fraud.
To detect fraud in your construction company, you’ll want to keep a close eye out for some of the most common indicators like a lack of checks and balances, unusual bid patterns, and unauthorized changes. Ignorance is never an excuse, legally or morally, when it comes to detecting and preventing criminal activity within your construction company, and purposefully not reporting fraud will always come with severe consequences. If you believe that construction fraud may be occurring in your company, it’s never too late to reach out to a Toronto contractor lawyer.
Related: How to Prevent Construction Fraud
Preventing Construction Fraud
When investing in fraud prevention has been consistently linked to lower counts of occupational fraud, there’s no reason you should not have a dedicated fraud program in place within your organization. Such programs are designed to reduce the risk posed by any weak internal systems and significantly increase the chance of stopping occupational fraud in its tracks. An effective fraud program may include any of the following measures:
- Dividing responsibilities among employees
- Designating a Chief Compliance Officer
- Performing internal and external audits
- Reviewing and approving all suppliers
- Conducting regular spot checks of equipment and materials to reconcile inventory against invoices
- Reconciling bank statements, payments, and other accounts regularly using different employees
- Maintaining a pay application checklist
- Conducting background checks on the people you do business with
- Training employees on compliance and ethics
If your company has been the victim of construction fraud, you need a representative that can help you avoid the associated penalties. For a legal ally that can protect your business before, after, and during any incidents of occupational fraud, turn to the Toronto contractor lawyers at Cotney Canada.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.