Forensics Journal - Stevenson University 2014

FORENSICS JOURNAL Similar to interviewing employees, owners of construction companies should also screen their business partners (Noyes 10). As with employees, it is impossible to know unequivocally whether someone is more prone to commit fraud, but there are traits to avoid in business relationships so as to reduce the risk of dealing with a crook. Construction companies are encouraged to conduct research before working with a new supplier or subcontractor (Noyes 10). First, it is important to find out how long the company has been in business (Noyes 10). This does not imply that all start-up companies are corrupt, but lack of experience may result in a company being susceptible to fraud. Construction companies should also perform a background check on the supplier or subcontractor to see if they have been involved in any illicit business in the past (Noyes 10). A quick internet search can uncover any unfavorable media attention the company may have received and a search of the SEC filings can determine if they have ever been investigated for fraudulent activity. A clear record is a good sign, but should not be misconstrued as an indicator of a flawless company. Owners of construction companies could also contact industry peers to check if anyone else has conducted business with the potential candidate (Noyes 10). People who have worked with the supplier or subcontractor can share their experiences, whether positive or negative, thus allowing the owner to obtain a better understanding of the quality of work the company performs. and materials to what the subcontractor purchased for supplies and materials on the same job. The general contractor is usually permitted to inspect documents and make inquiries of the subcontractor’s staff (Palmer 21). Not all standard contracts include a right to audit clause so the general contractor should make certain that one is explicitly stated (Palmer 21). Fraud is an inevitable part of doing business that has existed since the beginning of time and will continue to exist as long as individuals are able to exercise free will. Construction companies are particularly vulnerable to a number of damaging frauds such as materials fraud, overbilling, and bribery. Awareness of the types of fraud that the industry frequently encounters can help owners develop ways to detect fraud in their own companies. Common detection methods in the construction industry include protecting the procurement area, creating a whistleblower hotline, conducting internal audits, interviewing staff, and implementing surprise on-site audits. Perhaps more beneficial than detecting frauds currently afflicting a company is identifying proactive measures to prevent fraud before it occurs. Conducting fraud training, setting an ethical tone at the top, hiring the right people, segregating duties, screening suppliers, drafting detailed contracts, and including a right to audit clause are all invaluable techniques for preventing fraud in the construction industry. It is imperative that those working with construction entities realize fraud is a common occurrence and could happen to their company. Management should take proactive and deliberate steps to protect their company and business partners. A combined and determined effort can help reduce construction fraud to rubble. Subcontractors are crucial to the success of a construction contractor because they are relied upon to perform work for which general contractor will be ultimately responsible. Subcontractors usually perform work according to a contract agreed upon with the general contractor. A useful fraud prevention technique is to ensure the contract is detailed enough to specifically cover what the general contractor wants completed. If a fixed price for the project has been set, the general contractor needs to stipulate the type and quality of materials he wants for the job (Palmer 21). Since the price on the contract is essentially non-negotiable, general contractors need to be very precise about the end result so the subcontractor cannot take any cost-cutting measures. If the contract is a cost-plus contract, then the price will fluctuate depending on the materials and labor used on the job (Palmer 19). In this case, the general contractor can protect himself from overbilling by setting a price ceiling that the contract cannot exceed (Palmer 21). The more detailed a contract becomes, the less room it will leave for misinterpretation and mismanagement. REFERENCES “Auditing: CPA Exam Review.” Becker Professional Education. 2011 ed. Devry, 2010. Print. “Construction and Procurement Fraud.” False Claims Act Resource Center. False Claims Act, 2013. Web. 8 Sept. 2013. “Construction Fraud: Stories from the Field.” Baker Tilly. Baker Tilly Virchow Krause, LLP, 2010. Web. 8 Sept. 2013. “Corruption Prevention in the Engineering and Construction industry.” PricewaterhouseCoopers. PricewaterhouseCoopers, LLP, 2009. Web. 24 Sept. 2013. Another essential element to include within the contract with a subcontractor is a “right to audit” clause (Palmer 21). This clause states a distinct time period during which the general contractor’s audit team can examine the accounting records of the subcontractor (Noyes 10). The inclusion of this clause in all contracts is advantageous to the general contractor because he will have the ability to perform substantive audit procedures that may detect fraud. The audit team can compare what the general contractor was billed for supplies Eaton, Tim V., and Michael Akers. “Whistleblowing and Good Governance.” CPA Journal 77.6 (2007): 65-71. Web. 30 Sept. 2013. Farragher, George P., and Stephen M

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