On-Site Magazine

Finding, fighting, and foiling fraud

December 2, 2020   By Krista Johanson and Dagmara Mroczkowska

Within the construction industry, fraud victims can suffer damage to reputation and morale and can even lose tender opportunities

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.1

Construction fraud is not limited to misappropriation of materials and tools on the site — it also occurs in the office. Trusted, long-term employees perpetrate nearly half of all occupational frauds.2 These frauds are often the most insidious due to these employees’ ability to override internal controls, whether through delegated authority, system knowledge, or influence.3 Insider fraud is also the most costly: globally, insiders committed nearly half of reported incidents resulting in over US$100 million.4

Construction fraud victims suffer damage to their reputation, morale, productivity and loss of tender opportunities.5 Construction fraud also has additional costs, including penalties for violating industry standards or regulatory requirements and project delays or cancellations.6 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:7

  • 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.8

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.9

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.

 


Krista Johanson is a partner in Borden Ladner Gervais LLP’s Vancouver office with a construction disputes practice.

Dagmara Mroczkowska is an associate practicing in the areas of construction litigation and general disputes.

Although care has been taken to ensure accuracy, this article should not be relied upon as legal advice.

This column first appeared in the December 2020 edition of On-Site.


Notes

1 — Association of Certified Fraud Examiners & Dr. Dominic Peltier-Rivest, Detecting Occupational Fraud in Canada: A Study of its Victims and Perpetrators (2007) at 4, available online: https://www.acfe.com/uploadedFiles/ACFE_Website/Content/documents/rttn-canadian.pdf.
2 — Association of Certified Fraud Examiners & Dr. Dominic Peltier-Rivest, Detecting Occupational Fraud in Canada: A Study of its Victims and Perpetrators (2007) at 5, available online: https://www.acfe.com/uploadedFiles/ACFE_Website/Content/documents/rttn-canadian.pdf.
3 — PricewaterhouseCoopers Global Economic Crime and Fraud Survey (March 2020), available online: https://www.pwc.com/gx/en/forensics/gecs-2020/pdf/global-economic-crime-and-fraud-survey-2020.pdf.
4 — PricewaterhouseCoopers Global Economic Crime and Fraud Survey (March 2020), available online: https://www.pwc.com/gx/en/forensics/gecs-2020/pdf/global-economic-crime-and-fraud-survey-2020.pdf.
5 — PricewaterhouseCoopers Global Economic Crime and Fraud Survey (March 2020), available online: https://www.pwc.com/gx/en/forensics/gecs-2020/pdf/global-economic-crime-and-fraud-survey-2020.pdf.
6 — Daily Business Buzz, Grant Thornton Sheds Light on Fraud in Construction (March 19, 2013), available online: https://www.dailybusinessbuzz.ca/Construction%2520%26%2520Transportation/2013-03-19/article-3202922/Grant-Thornton-sheds-light-on-fraud-in-construction/1.
7 — Daily Business Buzz, Grant Thornton Sheds Light on Fraud in Construction (March 19, 2013), available online: https://www.dailybusinessbuzz.ca/Construction%2520%26%2520Transportation/2013-03-19/article-3202922/Grant-Thornton-sheds-light-on-fraud-in-construction/1.
8 — PricewaterhouseCoopers Global Economic Crime and Fraud Survey (March 2020), available online: https://www.pwc.com/gx/en/forensics/gecs-2020/pdf/global-economic-crime-and-fraud-survey-2020.pdf.
9 — A credit bureau report may alert you to legal judgments against the prospective employee, and may show whether the employee has a financial motivation to commit fraud.


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