Surety Bond Quarterly - Winter 2015 - (Page 16)

feature fraud sChemes and related Controls in the Construction industry FRAUd IN ThE construction industry takes on many forms, from asset misappropriation to financial statement fraud. According to the Association of Certified Fraud Examiners' 2014 Report to the Nations on Occupational Fraud and Abuse (RTTN), the average organization loses five percent of its revenues to occuBY JEREMY CLoPToN pational fraud. Factor in waste, abuse, and non-occupational fraud (fraud committed by those outside the organization) and the risk of lost revenues increases even further. Bond producers who are aware of these related schemes and the related controls better position themselves to sensitize their contractors and their issues. Common schemes in construction Proper application of data analysis for fraud detection and deterrence requires first understanding the various types of schemes committed within the construction industry. Figure 1 contains the five most common schemes in the industry, based on RTTN statistics. Data analytics as an anti-fraud control Many construction firms wonder what they can do to prevent fraud from occurring in their organization. After all, a determined employee can be very difficult to stop. It is unrealistic to think all frauds are preventable, but there is almost always more that organizations can do to reduce fraud risk in key areas. 16 surety BoNd Quarterly | WINTER 2015 Based on the RTTN, the most effective anti-fraud control is "proactive data monitoring and analysis" (data analysis). In fact, data analysis resulted in a nearly 60 percent reduction in median fraud losses and a 50 percent reduction in median scheme duration in the cases studied. In addition to the data analysis category, the process is also inherent in two of the most common methods of detection: management review and internal audit. For these reasons, and the growing volume of data generated by organizations each day, it is important for contractors to know how to use data analysis to deter and detect fraud. Application of data analysis Using the definitions of the schemes described above, we can identify the largest fraud risks: vendor management, disbursements, non-cash areas (generally inventory and/ or fixed assets) and payroll. Some of the most common analysis techniques in each of these areas include: * Vendor management: Many times, corruption and billing schemes occur through the vendor file. Looking for potential related parties or conflicts of interest, by comparing the employee and vendor files based on key attributes (name, address, phone, TIN, etc.), may help identify high-risk vendors. other beneficial analyses include a geospatial analysis of vendors to identify those located in residential areas, identification of vendors using a mailbox service and identifying vendors without an address, or some variation of "hold for pickup." * Disbursements: Billing and check tampering are both fraudulent disbursement schemes. In addition, corruption schemes typically involve a disbursement. Perhaps the most effective analysis technique related to disbursements is trend analysis, focused on the identification of accelerating patterns of activity. other common analytics include identifying checks issued on weekends, holidays or in round, thousand dollar increments. * Inventory and fixed assets: Detection of non-cash schemes through data is sometimes more challenging than schemes involving cash. This is caused by the limitations on available data for many non-cash assets. Some of the most effective techniques involve monitoring of inventory levels relative to sales, analysis of inventory shrinkage, testing existence of fixed assets and analysis of expensed fixed assets. The key to incorporating data into an analysis of non-cash assets is being proactive in capturing and retaining related data elements.

Table of Contents for the Digital Edition of Surety Bond Quarterly - Winter 2015

NASBP Upcoming Meetings & Events
2015-2016 Executive Committee
From the CEO - Never Forget Your Latin: Ignorantia Juris Non Excusat
Practical Insights: What You Need to Know - Unlicensed Contractors A Threat to Their Sureties
Hot Topics in Federal Government Contract Compliance
Fraud Schemes and Related Controls in the Construction Industry
Unravelling the Mystery of Court Bonds
NASBP Attorney Advisory Council Participates in NASBP Regional Meetings
Public-Private Partnership Projects
Mining the Value of the NASBP Member Network
Applied Education
Index to Advertisers

Surety Bond Quarterly - Winter 2015