Protecting your Construction Business Against FRAUD
Nicole Teska, CPA, CFE
Bowers & Company CPAs
NMT@bcpllc.com
Local newspapers are riddled with stories of fraud. The schemes are mostly perpetrated by a
trusted employee. So how can you, as a business owner, protect yourself? Not only as a business
owner, but as a business owner in the construction industry, what are some of the schemes you
should be aware of? How can you protect yourself and your company? This article will first
discuss common fraud schemes and then it will discuss things you can do to protect yourself and
your company.
The construction industry lives and dies by the WIP schedule. How would it affect your project’s
profit margin if there was $10,000 of fictitious expenses being reported to a particular job?
Would it cause you to overbid the next job? Would it cause you to lose your profit on the job?
Why not put controls in place to protect yourself. Cash disbursement schemes are the most
popular according to the Association of Certified Fraud Examiners (“ACFE”) 2014 Report to
The Nations report. The most common cash disbursement schemes fall in to two major
categories; check tampering and billing.
In check tampering schemes, the perpetrator takes physical control of a check and makes it
payable to himself through one of several methods. The most common check tampering schemes
include; 1) forged maker, 2) forged endorsement, 3) altered payee and 4) authorized maker. 1)
In a forged maker scheme the perpetrator steals blank check stock and forges the signature of the
signatory of the account. 2) The forged endorsement scheme is when the perpetrator intercepts a
company check intended to pay a third party and converts the check by endorsing the third
party’s name. In some cases, the employee also signs his own name as a second endorser. 3) An
altered payee scheme is when the perpetrator intercepts a company check intended for a third
party and alters the payee designation to their own name. 4) Lastly, the authorized maker
scheme, which might be the most difficult to defend against, is when a perpetrator with signature
authority on a company account writes a fraudulent check for his own benefit and signs his own
name as the maker.
There are controls that can be put in place to prevent your company from these check tampering
schemes. The first control is not giving signed checks back to the person that generated them.
Instead, give them to an administrative assistant or cash receipts accountant to mail out. Another
control is to keep blank check stock locked up under control of the signatory of the account. The
person should keep track of how many checks were given out and ensure that’s how many they
sign. There are other controls that can be put in place to detect if any of these schemes are
occurring. One control, is to have a person independent of bank reconciliation procedures obtain
the unopened bank statement. They should review the canceled checks for anything unusual i.e.
are there manual checks, checks made out to employees, checks with two endorsements, any
authorized signor signatures look unusual? All of these could be red flags of check tampering
schemes. By having someone independent of the bank reconciliation procedures review the bank
statement first, they could notice the unusual activity.
Billing schemes are just as common as cash disbursement schemes. The most popular billing
schemes are 1) false invoicing via a shell company, 2) false invoicing via non-accomplice
vendors and 3) personal purchases made with company funds. 1) In a false invoicing via a shell
company scheme, a perpetrator sets up a false shell company and bank account. The perpetrator
then begins submitting false invoices to be paid. 2) False invoice via a non-accomplice vendor is
when the perpetrator overpays a vendor’s invoice. When the vendor calls to inform the company
of this error, the perpetrator asks the vendor to send a refund check. The perpetrator intercepts
the refund check and forges the endorsement. 3) The last scheme, personal purchases made with
company funds, is when the perpetrator simply purchases personal items with the company’s
money. This could be done by either submitting unsanctioned invoices through the accounts
payable system for either office supplies or construction materials that could be used for the own
personal use. Or the perpetrator could take the company check for the utility bill and pay their
own bill instead.
There are controls that can be put in place to prevent these schemes from occurring. Segregation
of duties amongst the purchasing employees and the payment function is key. Also, making sure
a proper approval channel exists to approve invoices and payment. As well as making sure the
person signing the checks sees the invoices to support the payment. Additionally, the listing of
accounts payable vendors should be periodically reviewed for strange vendors and addresses.
There are also controls that can be put in place to detect any red flags, such as analyzing vendor
purchases for abnormal levels.
These cash disbursement schemes have the most effect on the construction industry. Review
your controls to help prevent or detect any possible fraud schemes. Are there segregation of
duties between your purchasing approval process and your payment function? Are there enough
controls in place over your payment function? Do your bank statements get reviewed monthly
for unusual cancelled checks? By implementing just a few small changes, it may save your
company thousands of dollars.