Fraud happens at companies both large and small. Why should smaller companies focus on construction internal controls? One advantage for large construction companies, however,
is that they are more likely to put fraud detection and prevention measures in place and catch the fraudster before the business is devastated. Small contractorsare often not in the position to withstand the damage that could be caused by a fraudster perpetrating crime for months or years without discovery. This level of fraud is expensive with median damages, according to the Association of Certified Fraud Examiners (ACFE), averaging around $140,000. And depending on the employee’s position within the company, the fraudulent actions could have other negative consequences to the construction business’ bottom line.
According to the Journal of Accountancy, only 56% of small businesses (defined as 100 employees or fewer) surveyed had external audits of their financial statements, and only 50% had a formal code of conduct for minimizing fraud. Of companies with more than 100 employees, 91% had external audits, and 90% had anti-fraud control measures in place.
Turning the Fraud Trend Around: Improve Construction Internal Controls
It’s possible that small businesses think that their risk of fraud is low enough that the cost of internal controls is prohibitive. However, these controls do not need to be expensive; there are many affordable ways that a small construction business owner can approach an internal controls plan. These include:
- Separating accounting functions. The individual who handles receivables should be a different person from the individual who handles payables.
- Signing checks rather than using a signature stamp.
- Monitoring and comparing incoming payments to outstanding invoices.
- Establishing a method for employees to submit anonymous complaints of potentially fraudulent activities.
- Cross-training employees and rotating duties.
- Don’t be hands-off about company finances. Open financial statements and compare them against internal documents and review ledgers and journals regularly.
- Creating an internal system of checks and balances by training managers and employees to recognize the signs of fraud.
- Ensuring computers and smartphones are password-protected, and regularly monitoring their activity as smartphones and computers make it easy to engage in fraudulent activities. Be able to identify when a phone or computer has accessed the network or company data inappropriately or suspiciously.
It’s also worthwhile to have an external audit of your company’s financials on a regular basis. CRI’s construction CPAs can work with you to establish anti-fraud policies, internal controls, and regular external audits. Together we can keep your business focused on the future.