Fall 2015 Issue of Horizons

The Importance of Internal Controls After identifying common fraud activities, a company must design a control structure that will reduce the opportunity for fraud and increase the chances fraud will be detected. Although there are no guarantees related to fraud, the foundation to a strong internal control environment is proper segregation of duties. For example, the person in charge of setting up vendors should not be the person who approves vendor payments or reconciles bank statements. Moreover, the payroll clerk should not be the same person who disburses paychecks. Proper segregation of duties applies to all areas of business and can be employed effectively at little or no cost. Here are some other simple yet effective internal controls you can implement with relative ease: ∙ Compare job cost estimates with actual costs. Require approvals for cost adjustments or transfers of costs between jobs. ∙ Require that materials estimates above a specified amount include quotes from two or more vendors. ∙ Make purchases only with pre-numbered purchase orders, and match them to both receiving reports and invoices before payment is made. ∙ Check vendor invoices against estimates to ensure proper discounts and pricing. ∙ Always refer to specific job numbers, phase codes or work order numbers in onsite communications. ∙ Check all estimates for accuracy of calculations, labor rates and correspondence with drawings.

The schemes can be payments to fictitious vendors, overpayments to vendors (often through collusion with an internal employee) and purchases of personal items with company funds. Theft The construction industry is particularly susceptible to theft of materials due to the location of jobs and the difficulty of tracking construction materials. Job sites can be in remote areas or some distance from the corporate headquarters and subject to less supervision. Additionally, materials on job sites are hard to track and measure during the construction process. Items lying around a job site like lumber, concrete, copper pipe, wire and cable can create an opportunity for thieves if proper controls are not in place. Misuse of Company Equipment Similar to a theft of materials, misuse of company equipment can also become an issue if there is a lack of controls present. For instance, an employee could operate a side business using a company’s idle equipment. Bid Rigging & Corruption Contractors are subject to the risk of bid rigging and other forms of corruption. In the ACFE study, nearly 47% of the fraud cases examined in the construction industry had an element of corruption. Whether it was bribery, kickbacks or quid pro quo situations, the bid process can be riddled with opportunity for this type of fraud. Other Fraud The construction industry is also subject to the same fraudulent activities faced by every other industry. These include payroll fraud through fictitious employees, check tampering and fraudulent expense reports.

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