3 minute read
Contractors and the law
Finding, fighting, and foiling fraud
Your company cannot afford to ignore fraud. In Canada, the typical organization loses five per cent of its annual sales to fraud every year. Small organizations, which can lack internal controls and have limited resources, lose even more.
Construction fraud is not limited to misappropriation of materials and tools on the site – it also occurs in the office. Trusted, longterm employees perpetrate nearly half of all occupational frauds. These frauds are often the most insidious due to these employees’ ability to override internal controls, whether through delegated authority, system knowledge, or influence. Insider fraud is also the most costly: globally, insiders committed nearly half of reported incidents resulting in over US$100 million.
Construction fraud victims suffer damage to their reputation, morale, productivity and loss of tender opportunities. Construction fraud also has additional costs, including penalties for violating industry standards or regulatory requirements and project delays or cancellations. This article provides tips on how to prevent employee fraud and what to do when you suspect fraudulent activity.
IDENTIFICATION OF EMPLOYEE FRAUD
Common schemes include: • Non-payment of subcontractors and material suppliers • Secret commissions or kickbacks • Inventory or asset misappropriation • Accounting or payroll fraud • Payment applications containing false or inflated supplier invoices
PREVENTION AND DETECTION
Investing in fraud prevention has been linked to lower costs when fraud does strike.
A dedicated fraud program can both reduce the risk posed by weak internal systems and increase the chance of detecting fraud when it occurs. An effective fraud program can include: • Division of duties (or at least mandatory vacation to allow other employees to share in responsibilities) • Requiring original documents, such as invoices, when signing cheques • Reviewing and approving suppliers • Conducting spot inventories of equipment and materials, and reconciling inventories against invoices • Reconciling of bank statements, payments and other accounts at least monthly, using different employees • Performing annual outside reviews without notice
When hiring, double-checking resume details and contacting references is key. An organization can also request written consent to obtain a credit report from its applicants.
INVESTIGATING AND RESPONDING TO FRAUD
A lawyer can help you direct a successful investigation, avoid employment law problems and prevent defamation allegations.
Notify your fidelity insurer, if you have one, at the outset of a suspected fraud.
Never threaten to go to the police or otherwise coerce a confession. Confront your employee in a team of two (one to run the meeting and one witness to make notes). Present the evidence and note any explanation. Avoid drawing conclusions until there is enough supporting evidence. Evidence must be carefully secured and not marked in any way.
RECOVERY
Consider negotiating a settlement immediately, but address potential concerns of insurers, trustees in bankruptcy, and other creditors, if applicable.
Retain legal counsel with fraud recovery expertise: creative efforts will be more successful than a standard lawsuit. Claims may be possible against auditors who failed to detect the fraud, or third parties who have benefitted from it. If you face a substantial loss, asset-freezing orders and search orders can be extremely effective to preserve funds or evidence.
