Is Employee Fraud Hurting Your Bottom Line?

The average business loses five percent of its annual revenues to occupational fraud, according to estimates by participants in an Association of Certified Fraud Examiners (ACFE) survey. But for the construction industry, losses pertaining to job sites, plant sites and job management are more common than accounting and financial fraud.

While you may think you’re losing the battle against fraud and theft, there are ways you can beef up your controls to fight back against fraudsters.

Add a chapter to your employee manual describing your company’s policies on employee theft and fraud. Be specific, too. If a worker were to steal company office or construction supplies for personal use, spell out the consequences. The most commonly stolen items besides labor are cash, fuel, minor parts (such as batteries, oil filters, tires) and construction materials (such as lumber, copper and steel).

Make sure your policy also explains that all violators will be terminated and prosecuted, if the crime deserves it. In addition, inform employees that they need to be aware of what is going on around them and to alert a supervisor if they believe foul play is going on.

Telling employees to report any wrongdoing is one thing, but you also need to protect those who do. Provide a confidential mechanism, such as a toll-free hotline, through which a worker can communicate concerns or “blow the whistle” on perpetrators. Taking this step increases the likelihood that fraud will be exposed before it seriously harms your company.

The best way to prevent fraud and theft is to pinpoint the wrongdoers before they start working for you. Make sure you conduct thorough background checks on prospective candidates, even those who come highly recommended from a trusted source. The most common behavioral red flag among fraudsters is that they live beyond their means. Other indicators include gambling, drinking and drug issues. Consider the advantages of individual fidelity bonding for certain classes of employees as opposed to blanket bonding.

Although you may need to hire an outside firm to search for previous criminal convictions, this extra up-front expense can save you money, hassles and your reputation down the road. Moreover, be wary of job applications and resumés showing frequent job changes, and make sure any gaps in employment history are reasonable and fully explained.

Smaller contractors may rely on one or two employees to handle several critical duties. For example, one person may be responsible for both accounts receivable and accounts payable. However, personnel responsible for billing and receivable functions should never come into contact with receipts or deposits.

To make it harder for workers to dip into the till, divide accounting and finance-related responsibilities among several employees. For example, have someone independent of the purchasing or vendor payment functions review all new supplier entries.

Your CPA is a good resource for uncovering fraud and embezzlement. For example, he or she can make random, unannounced audits to help identify potentially dangerous gaps in your controls and procedures. A CPA can also help create an effective internal control environment and monitor bookkeeping records, invoices, bank statements, payments, journal entries, financial reports and other documents with an eye toward identifying red flags.

It’s important to be a good example to your employees. Don’t fall into traps such as failing to report income, padding expense accounts or taking home office supplies for your kids. If workers see such behavior at top levels, they may develop a sense of entitlement that could lead them down the slippery slope to occupational fraud.

Rather, promote an honest, positive work environment. Encourage employees to be ethical and to act in the best interests of the company.

Fraud is likely here to stay, but that doesn’t mean you have to tolerate it in your construction business. By implementing the steps noted above, you’ll have a fighting chance to combat thieves. If you’d like to learn more about how to tackle internal fraud, contact your CPA.