Falsifying payment applications, covering up the purchase of personal items, diverting money to a phantom company, taking material from the work site for personal use, or using lower-grade material are just some issues plaguing the construction industry when it comes to fraud.
EY’s “Managing bribery and corruption risks in the construction and infrastructure industry (2017)” report, citing the Organisation for Economic Co-operation and Development (OECD), confirms that the real estate, construction and associated industries are among the sectors with the highest level of corruption risk: 40% of foreign bribery cases occurred in construction, transportation, information, and communication.
40% of foreign bribery cases occurred in construction, transportation, information, and communication…
Clearly, more companies need to wake up and recognise that fraud and corruption costs, both in terms of profits and the company’s reputation.
Grant Thornton’s 2013 ‘‘Time for a new direction: fighting fraud in Construction” report is full of insight from forensic and investigation teams in Australia, Canada, India, the UK, and the US. Drawing on research from these five countries, the study explored why fraud occurs so frequently in the Construction sector. It also provides practical guidance for organisations that want to identify fraud and mitigate their risk.
The eight most common types of fraud in the Grant Thornton report are:
1. Billing fraud
2. Bid/contract rigging
4. Fictitious vendors
5. Change order manipulation
6. Theft or substitution of materials
7. False representation
8. Money laundering/tax avoidance
So how much is fraud truly costing Australian construction businesses?
According to the statistics from the Australian Bureau of Statistics (ABS), in 2010/11, the construction industry employed around one million people and produced AU$102 billion of value, equating to 7.7% of the total economy. Applying the Association of Certified Fraud Examiners 2012 global estimate of 5% of revenue lost to fraud, would give a total estimate of AU$5 billion in construction fraud per year.
EY state that the four main reasons why the risk of corruption is so high in the construction industry are bribes on both supply and demand, third-party fraud, and employee fraud.
With decision-making control concentrated in the hands of a relatively small number of people, there are many opportunities for solicitation by public officials and otherwise. On the supply side, most projects involve a large number of local subcontractors, consultants, and agents. These companies and individuals may be willing to pay bribes or offer gifts to win contracts or obtain permits.
Complex projects also often involve changes to specifications and cost overruns, employing thousands of vendors.
Complex projects also often involve changes to specifications and cost overruns, employing thousands of vendors. Such large-scale situations offer opportunities for companies at all stages of the project to falsify invoicing, substitute or steal materials, manipulate labour costs, and engage in bid-rigging or collusion. Poor governance, lack of transparency, legal loopholes, and family ties also present the potential for conflicts of interest.
So what exactly is being done to face this issue?
The anti-fraud governing body is Australia is the Australian Competition & Consumer Commission (ACCC), which promotes competition and fair trade in markets to benefit consumers, businesses, and the community. They also regulate national infrastructure services. Their primary responsibility is to ensure that individuals and businesses comply with Australian competition, fair trading, and consumer protection laws – in particular, the Competition and Consumer Act 2010.
Grant Thornton Australia partner Chris Watson states that poor controls are the single biggest factor for allowing fraud to occur.
Grant Thornton Australia partner Chris Watson states that poor controls are the single biggest factor for allowing fraud to occur. He says that project owners and managers should implement “mitigating, preventative and detective controls to capture fraud risks in a register, institute policies to mitigate identified risks, and use technology for data-intensive procedures.”
Technology is also seen a big factor in fighting fraud, with Erik Lioy, a Fraud specialist at Grant Thornton US stating that technology “could save the global construction sector from a $1.5 trillion fraud bill in 2025.”
Although perpetrators of fraud use technology to help them falsify payment applications by creating fictitious vendors, on the whole, technology advance rather favours those investigating fraud. Companies can use technology such as e-auctions, which can be effective in preventing supplier collusion or instances of corruption.
There are software and systems available that will create red flags to help companies identify possible fraud. These systems, coupled with the power available in today’s microprocessors, have made it possible for many companies to combine large amounts of data to identify threats or possible weaknesses in controls.
Finally, the Grant Thornton report recommends companies put aside reputational issues and speak more openly about the issue of fraud. It will allow companies, in turn, to foster a greater willingness to prosecute the perpetrators.
“This will send out a message that the construction industry is not open for fraud,” says Sian Sinclair, Grant Thornton’s Australian leader, Real Estate and Construction.
There are software and systems available that will create red flags to help companies identify possible fraud.
Strategic steps to protect against the risk of fraud, centre around managing risk, investigation, and prevention. Both EY and Grant Thornton recommend a top-down corporate governance policy, fraud risk assessments and preventative controls, utilising technology for data intensive procedures, and training staff to deal with any fraud-related problems and evaluate the effectiveness of procedures in response to events.
Fraud needn’t be the ‘cost of doing business’, and yet the Construction industry in Australia is estimated to be 10 to15 years behind the curve in the use of fraud detection and prevention technology.