The COVID-19 pandemic has put immense pressure on construction contractors as well as their employees. This is like nothing the industry has experienced, and the upheaval of the past few months has presented opportunities for bad actors to take advantage.
Now is the time to ensure your firm has the anti-fraud strategies in place to minimize risk and be proactive in protecting your company and your employees.
Evaluating the “Fraud Triangle”
According to the classic “fraud triangle” theory, pioneered by noted criminologist Donald Cressey in 1953, three conditions commonly lead employees or others to engage in schemes to defraud a company:
- Motive (or pressure). This could result from financial pressure or less obvious types of stress, such as the pressure to meet business goals or an employer’s expectations.
- Rationalization. In most instances, employees who commit fraud have found a way to rationalize their dishonest behavior.
- Opportunity. Regardless of motives and internal rationalization, a fraud scheme generally does not begin until a fraudster sees an opportunity to get away with it.
The COVID-19 pandemic and economic shutdown have exacerbated each of these conditions. For example, in addition to the financial pressures stemming from furloughs or temporary layoffs, retained or returning employees may also face additional pressures such as the costs of supporting sick relatives or the stresses of home schooling and other disruptions to their normal lives.
They also may find it easier to rationalize or justify their actions as being a necessary, one-time response to an unforeseen emergency, particularly if they know the normal monitoring procedures and controls are not functioning due to staff shortages or other crisis-driven changes.
Changes to the Risk Environment
The economic shutdown has also changed the overall fraud deterrence and risk management environment in many companies. For example, criminologists generally agree that the most common starting point for a successful fraud investigation is a tip from a suspicious employee. But the COVID-19 crisis has significantly restricted live human interactions that could lead to tips.
Administrative employees working from home are likely to have fewer opportunities to observe others’ behaviors. Overworked employees are also more likely to be tempted to take shortcuts, skip necessary controls, or overlook others’ ethical violations if they are distracted by other concerns.
In many instances, layoffs and furloughs have led to changes in employees’ roles and responsibilities, resulting in gaps in critical skills and capabilities. The risks of expense manipulation and time and billing fraud also increase with remote workers.
Another significant concern is the way that many companies have had to limit or reduce their formal fraud detection activities. Self-isolation and social distancing can inhibit a company’s ability to maintain compliance programs, conduct investigations, and perform internal audits and other necessary risk management activities.
For construction-related businesses in particular, the current business environment can contribute to a greater risk of vendor-related fraud. Supply chain disruptions and shortages of critical materials increase the opportunities for bribery or collusion with vendors, particularly because vendors themselves are likely to be subject to greater financial pressures. Contractors also need to be alert to the possibility of inferior, substandard, or counterfeit products being used to offset supply or equipment shortages.
Finally, the risk of technology-driven fraud schemes such as phishing attempts and other data breaches continues unabated despite the pandemic. Companies should be particularly careful that employee terminations or furloughs are handled with adequate security and system safeguards.
A Proactive Approach
Construction businesses’ reaction to the pandemic has evolved. After the initial shock, many are now on firmer footing, hoping to capitalize on new opportunities and make up for lost revenue. However, as companies push ahead with new plans, it’s critical they not let guard their down or put anti-fraud measures on the back burner.
A comprehensive strategy of proactive compliance reviews, audits, inventory monitoring, and collaboration among those charged with oversight is the best approach to ensure a firm’s rebound will not be sabotaged by illicit activity.
Dembo Jones’ team of construction industry specialists knows how to spot fraud and the risk factors that can make your firm vulnerable. Contact us today for an analysis of the threats and opportunities facing businesses like yours as you plot your way forward.