Fraud Exposure Putting Canadian Builders at Risk
Tips to Prevent Fraud and Create Culture of Awareness
Fraud is everywhere, in every industry. But for Canadian construction and design firms, the negative impact can be substantial. In their 2018 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) cited the median fraud loss in the construction industry to be USD$227,000; this is above the Canadian median of USD$200,000 and significantly higher than the global median of USD$130,000.
Financial loss is only one piece of the potential fallout. Unchecked, fraud can lead to client losses, employee turnover, license and permit suspensions, project delays, removal from proposal and tender lists, regulatory enforcement penalties and, of course, reputational damage.
Despite these undeniable negative consequences, private companies often balk at the suggestion that they implement a substantive fraud prevention program. Assuring themselves “there are bigger targets” and that “it won’t happen to us,” they feel they can’t justify the costs of implementation. The truth is, however, that large public companies often have the necessary safeguards in place to protect themselves, making private organizations more likely to be victims. And with technology advances across the construction and design industry, opportunities for fraudulent activities are growing. With many employees working from home in light of the recent COVID-19 crisis, the risks that your business faced before the pandemic haven’t gone anywhere—in fact, some of them may have been increased.
The good news is that fraud prevention programs don’t need to be expensive. In fact, one of the most successful strategies you can undertake is to create a culture of fraud awareness, which can be done for minimal investment.
Tips for preventing fraud and creating a culture of awareness
Employees are your first line of defense: At the end of the day, it’s people who engage in fraud—and people are also usually the first to identify when something is not right.
While common fraud-detection strategies such as data analytics and surveillance are effective, most occupational fraud actually comes to light as a result of an insider tip. In fact, internal reporting (where employees uncover wrongdoing) can be more effective than internal audit and surveillance/monitoring combined. For that reason, it is critical to train your employees about fraud prevention and detection techniques. Fraud awareness training is about empowering all your employees, not just IT or finance professionals, to be your eyes and ears in all areas of your operation.
To achieve a level of fraud awareness that spans the entire organization, training should be an ongoing activity, not a one-time event. It should be incorporated into new employee orientation and should be repeated and updated regularly.
Effective fraud awareness training: You want your employees to understand what fraud is, how it can happen in your industry, and the red flags to look out for.
Cases of fraudulent activity in the construction and design industry are abundant, providing a laundry list of common schemes. Billing fraud, bid rigging, bribery and corruption, fictitious vendors, change order manipulation, theft or substitution of materials, false representation and money laundering are nothing new, but they’re constantly emerging in new ways given the prevalence of technology in our work environments.
For instance, business email compromise, also known as CEO or CFO email scams, are becoming more and more common in the construction industry. Hiding behind a fake but very real-looking email, thieves request an urgent wire payment from an employee. More recently, fraudsters have been using these emails to claim that a known supplier has changed its banking information—and then providing their own account details instead. When the next payment is sent, it goes to the thieves rather than the supplier.
Cybercriminals are also taking advantage of the COVID-19 panic, creating phishing campaigns suggesting cures and treatments, or linking to fake websites, all designed to separate users from credentials or capture personal and sensitive information.
Employees and management should also be on the lookout for suspicious behaviour within an organization. As unpleasant as it is to think that a trusted employee might be acting unethically, personal factors remain the major driver for fraudulent activities. Basic greed or stress from financial or emotional issues can drive employees to act or make them vulnerable to external criminal influences. Training should include identifying personal risk factors that can heighten the risk of internal fraud. For example, employees who have unusually close relationships with vendors/customers, or those who refuse to take vacation or share duties could be red flags.
The tone at the top
If a business owner or executive team believes that fraud only happens to large corporations or thinks the risk is small, it’s nearly impossible for the rest of their organization to take fraud mitigation seriously. Upper management has to educate themselves on the current threats facing their industry and their organization and communicate to their people that fraud awareness is everyone’s responsibility. The attitude and behaviour at the top have a significant impact on whether an organization adopts a fraud-awareness culture.
A proactive attitude toward fraud should be reinforced through clear, well-documented internal policies. Your code of conduct, fraud prevention or reporting policy and investigation and remediation policy should all be easy to find, well-communicated and regularly updated.
Providing tools and resources: Whistleblower hotlines are one of the most cost-effective fraud-fighting measures—because they work. According to the ACFE’s report, 40 per cent of all occupational fraud is uncovered by a tip.
It should go without saying, but it’s important to ensure that your hotline operates effectively. Just as with all elements of your fraud prevention program, management must demonstrate a commitment to the hotline through proper awareness and training efforts. Employees should know how the hotline works and how to use it. Most importantly, measures must be in place to protect whistleblowers’ identity and shield them from any retaliation—to give your employees confidence about stepping forward.
Consider also opening the hotline to customers, vendors, and, where appropriate, the general public. Employees are not the only individuals who can witness wrongdoing. According to the ACFE report, 21 per cent of the fraud uncovered tips in 2018 were brought forward by customers.
Testing 1, 2, 3: Internal controls are the most effective way to prevent fraud, and one of the most basic safeguards for every company to have—and yet, according to the ACFE, lack of such controls is the most common reason behind fraudulent activity. The organization says 30 per cent of internal fraud cases are caused by a lack of a simple risk-prevention strategy.
While most organizations tend to have basic controls in place—such as codes of conduct, external audit of financial statements, regular management reviews, fraud risk assessments, and internal audit departments—many aren’t being used appropriately. For instance, random internal audits can detect fraud and deter potential fraudsters, but only if they’re a surprise, not conducted in a regular or predictable pattern. One of the keys to creating a culture of fraud awareness in your organization is to frequently review, monitor and test your internal controls to ensure things are working as they should be.
Since a fraudster’s only limit is his or her imagination, it’s impossible to protect your company from every type of fraudulent act or predict accurately how fraud will morph in the future. But raising the level of fraud awareness within your organization is a critical step to mitigating your risk exposure, especially during this turbulent time.
As a Senior Manager in Grant Thornton LLP’s Risk and Forensic Services group, as well as a qualified Chartered Professional Accountant (CPA) and CA-designated specialist in investigative and forensic accounting (CA-IFA), Caroline specializes in providing forensic accounting and litigation support services, as well as a wide range of anti-fraud work, to a diverse client base.