Economic crime in the engineering & construction (E&C) sector continues to grow. In 2009 it was estimated to be at 24 percent. In 2016 that had risen to 30 percent.* While we all like to think “it couldn’t happen to us”, fraud is becoming more pervasive and sophisticated, which may lead you to ask “how much is this costing us in the market and to our bottom line?”
E&C firms must be willing to invest in the necessary prevention and detection controls before becoming a victim to fraud. Good governance and maintaining consistent procurement processes will help avoid reputational damage.
When fraud occurs, it can have a profound impact on profitability and equally importantly, on your reputation. In the worst case scenarios, regulatory penalties and litigation could, depending on the outcome, preclude you from being able to bid for public sector contracts indefinitely.
If a fraud investigation needs to take place, you want it to be carried out with speed, sensitivity and discretion with minimal disruption to your day-to-day business. You can reduce your risk now by putting in place a plan of action which doesn’t involve hiring new staff or creating burdensome, costly and time-consuming administrative processes.
In the E&C sector economic crime can occur across the business and at all levels. The most common types of fraud are:
1. Asset misappropriation. Construction materials are relatively easy to steal and sell on the black market. Indeed, material losses have long been seen as part of the cost of doing business for contractors.
2. Creation of false supplier invoices.
3. An engineer accepts supplier invoicing for quantities higher than delivered and shares the profits or accepts different grade products in exchange for a split in the profits made on the sale.
4. Unauthorized political contributions made by the organization.
5. Political contributions made by employees and reimbursed by the organization through expense accounts or special bonuses.
Understanding who is perpetrating the fraudulent activities is the first step to preventing it from occurring in your organization and on your projects. Tellingly, E&C companies face a threat from within. Far more perpetrators of the most serious economic crimes are among the senior management ranks. This indicates a serious problem, as fraud by senior management is more likely to pervade the entire organization. In addition, it can be harder to uncover as whistleblowing programs may be less effective in these instances.
Having strict anti-fraud strategies is essential for long term growth and stability. There are direct benefits to creating a corporate culture with a zero-tolerance policy for fraudulent crimes:
It’s always preferable to prevent fraud from occurring. If you’ve experienced an incident, a forensic investigation will tell you how and why the fraud happened, and will also provide you with prevention strategies to reduce the likelihood of it happening again in the future and the impact to your bottom line.
1. Identification – Typically, fraud is only detected because an anomaly is spotted. Conducting a fraud risk assessment will help you to understand the fraud triangle of Motivation – Opportunity – Rationalization. When combined with effective analysis, it will help identify where and when fraud is most likely to have occurred.
2. Prevention – Implementing strong prevention controls such as a code of ethics; clearly communicated policies and procedures; having transparent investigation protocols together with the consequences for unethical behaviours will set the tone from the top. Regular supplier/contractor due diligence and frequent internal reviews will set high expectations for employees, suppliers and clients.
3. Detection – Continuously testing and monitoring your protocols will help reduce exposure to fraudulent activities. If you’ve not already done so, consider putting in a place a whistleblowing program as part of your zero-tolerance policy messaging. The use of data and analytics to detect fraudulent activity is also a valuable tool. The right algorithms will detect anomalies by identifying data that does not conform to expectations.
While no one can guarantee you’ll never be a victim of fraud, you can significantly reduce the probability of it occurring, and the impact to your business and your reputation. There are easy and painless controls you could implement to mitigate your risk. Connect with PwC’s Construction & Engineering and Forensic Services specialists to learn more.