Spring 2006 issue of Horizons

INDUSTRY CONTRACTORS Internal Controls for Contractors

A strong system of internal controls is the best way to prevent fraud from occurring at your company. Contractors are vul- nerable to fraud by the very nature of their operations, which usually involve numerous job sites and employees. In partic- ular, smaller contractors are especially vulnerable in that they may lack the resources to implement adequate internal con- trols. As a reminder, we will review various fraud schemes that are prevalent in the construction industry and address actions that can be taken to prevent or detect fraud. Ghost Employees A common type of fraud affecting contractors is the use of ghost employees. Under this scheme, the embezzler enters fictitious employees into the payroll system and receives the resulting payroll checks. A variation of this scheme is keeping terminated employees on the payroll after they have left their jobs. The embezzler then receives the paycheck for the ter- minated employee. A “surprise” distribution of payroll checks by someone independent of the field and payroll operations is a good procedure for detecting this type of fraud. Construction Theft Construction equipment and tools are attractive targets for thieves. Construction theft is generally committed by either employees, other contractor employees at the job site, or professional thieves. Background checks on prospective employees and spray painting/engraving a distinctive logo on equipment have been successful measures in reducing construction theft. Photographing all equipment, maintaining serial numbers, and observing equipment on a regular basis is important. Restricting access to job sites by physical security measures and requiring proper identification to enter worksites are obviously important in deterring construction theft. Company Equipment Another fraudulent scheme involves the use of company equipment, materials or labor to perform jobs on the side. The employees then pocket all the revenue from the side jobs. This type of fraud can be very difficult to detect and often is discovered when an event (i.e., employee injury, cus- tomer complaint) occurs at the previously unknown job site.

Frank Hogg, CPA Mark Jansen, CPA

27 • spring 2006 issue