418: Steps Construction Company Owners Can Take To Avoid Employee Fraud

This Podcast Is Episode Number 418, And It's About Steps Construction Company Owners Can Take To Avoid Employee Fraud

Billing schemes. Skimming. Check-tampering. Employee fraud is a real risk for businesses with fewer than 100 employees. In fact, according to the Association of Certified Fraud Examiners, small businesses lose almost twice as much per scheme to occupational fraud.

If you Google Search "Construction Bookkeeper Embezzlement," you will see thousands of hits, and most of the problems construction companies suffered could have been avoided if the owner had known about and followed a few simple guidelines.

Unfortunately, until a contractor has gotten to know us, they tend to think of us as just another contractor's bookkeeping service. This means some contractors think we are crazy to suggest that any trusted employee, especially an in-house bookkeeper, would steal money from their company, and so they ignore us until it was too late.

Be aware of the "Employee Theft 10-10-80" Rule

Discovered over many years of experience and first-hand observation by auditors, accountants, fraud examiners, anyone involved in detecting employee theft.

Ten Percent - Of all employees, including bookkeepers, will steal in a variety of ways from office supplies, petty cash, graft, kickbacks, and payoffs from your suppliers, vendors and sub-contractors and even hundreds of thousands or even millions of dollars. They will do it regardless of how many security systems are in place because they lack integrity and have a "taker's" entitlement paradigm that states: "It Is Better To Take Than To Make." They cannot be stopped, only caught! And only then if you have systems in place and if you can convince the criminal justice system to take action, good luck with that!

Ten Percent - Of all employees, including bookkeepers, will never steal because they have integrity and a "Producer's" paradigm that states: "It Is Better To Make Than To Take." In the end, these are the people who will add so much value to your company you cannot help but reward them with more money, benefits, and recognition. Because if you do not, they will be recruited by your competitors. 

Eighty Percent - Of all employees, including bookkeepers, will steal if they feel confident they can get away with it and if circumstances allow for it due to weak integrity and a sense of "Redistributing The Wealth, But Not The Work Or The Responsibility."

Recognize the most common signs of fraudulent activity before an unscrupulous employee destroys your construction business:

Identify high-risk employees

When an employee has something to hide, their behavior may become suspicious; they may act closed off, secretive and defensive.

A typical clue is a worker who won't take time off for a holiday (because someone may take over their duties and discover the fraud). Others will try to cover up their improved financial status - a new car or home, for instance - with tales of a lottery win or inheritance.

In addition to employees acting suspiciously, high-risk employees might also include those:

struggling with debt dealing with mounting bills because of unfortunate circumstances (e.g., divorce, a family member's poor health) with a history of drug abuse  involved in risky financial ventures (e.g., gambling, investments) 

If an employee has a motive for fraudulent activity at work, think of the following behaviors as red flags.

Access and opportunity

Unsurprisingly, the highest risk employees for fraud have trusted roles in financial services: Accounts Payable, Accounts Receivable, accounting, and bookkeeping.

To commit fraud, or in this case, embezzlement, an employee must have both access and opportunity - that is, access to funds, banking records, and accounting data. The ideal situation is someone entrusted with performing multiple roles; that is, they can both cut and sign checks, process AP, and handle bank reconciliations.

Unmanaged Control

Access is just one part of the equation when it comes to employee fraud. Also, keep a watchful eye on employees who exert control over certain aspects of their job. 

For instance, they may insist on:

working unnecessarily long hours  working outside of regular business hours performing specific job duties and refusing to share individual tasks only dealing with a particular supplier or vendor*

* A common employee scam is known as "purchasing fraud" when a supplier or vendor inflates an invoice amount, the employee cuts a check, and both parties split the difference.

Red flag scenarios

Monitor your financial records closely, and investigate if you come across the following discrepancies:

Mismatched payees: the name on a cashed check doesn't match the name entered in the general ledger

Identical payments:  two checks have cleared for the same amount to different vendors in the same date range; one may have been authorized on the strength of supporting documentation for the legitimate payment. 

Questionable companies: a supplier or vendor with unprofessional invoices (i.e., apparent errors, a missing or incorrect address, home address, or non-existent web presence)

Construction Bookkeeping Embezzlement

Bad Bookkeepers will leave you with unfiled and unpaid taxes. They come in every race, creed, color, gender, age. There is no definitive profile, no absolute way to know which contractor bookkeeper is an embezzler until they have been caught and convicted, and even then, if you do not perform extensive background checks, you may never know it until it is too late.

Just because you catch a bookkeeper embezzling funds, don't think for one minute they will always be punished and made to pay you back. For the most part, you must understand that employees are poor innocent victims of brutal greedy business owners in the eyes of the public.

I have seen bad bookkeepers ruin too many businesses, especially construction businesses. In most cases, it was Bookkeeper Incompetence or Bookkeeper Embezzlement, and in other cases, it appears to me there may have been some deliberate identity theft; however, I cannot be certain.

All I know for sure is that I have witnessed business failures that have led to divorce, families destroyed, finances wiped out, and people living on the streets. In a few extreme cases, I know of contractors who have taken their own lives, and this needs to stop!

Final thoughts

Now that you know how to spot the most common warning signs for employee fraud, your management team must take steps to combat it.

Let this post be a reminder to watch for suspicious employee behavior. Segregate financial roles, so no one has unlimited access, control, or opportunity - and ensure your bookkeeping is always up to date so any "red flag" scenarios can be dealt with promptly.

About The Author:

Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com