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Four Ways Dishonest Employees Can Steal Your Money

Contractors and their employees have a reputation for working hard—and for good reason. You operate in a labor-intensive, deadline-oriented industry. Yet, you can work as hard as you like, and it will all be for nothing (or less than it should be) if you don't take steps to prevent internal fraud. Here are four ways dishonest employees can steal your money and how to fight each one.

1. Ghosts in the machine
   
   The payroll process for construction companies is often complex, making it a prime target for fraud. Keep an eye out for a scheme involving fake or "ghost" employees.
   
   Here's an example: A foreman uses his position to create a ghost employee to work on his crew. He records all of the hours this ethereal employee puts in and, with the help of someone in your payroll department, receives and cashes the ghost employee's paycheck.
   
   One way to expose the presence of ghost employees is to, at least twice a year, hand out paychecks yourself. Do so at random times and with no warning whatsoever. If you have checks left over, be sure they're drawn for legitimate employees.
   
   Another measure to consider is making sure one person doesn't handle payroll duties exclusively over a long period of time.
2. Accounts receivable lapping
   
   In some cases, a dishonest employee will make off with your cash before it even hits the books. A typical scheme of this fashion is known as accounts receivable "lapping."
   
   An example might be an accounts receivable clerk who periodically pockets a payment from one of your monthly service contract customers. Then, when the next monthly payment comes in, he or she applies that payment to the previous month's invoice. This can go on undetected for months—even years.
   
   To prevent lapping and similar schemes, be sure to segregate banking responsibilities from accounts receivable and accounts payable functions. It's harder for dishonest employees to conceal their actions if they can't cover their tracks in the bank reconciliation process.
   
   In addition, enforce mandatory vacations of at least one week per year. Dishonest employees tend to dislike taking time off knowing that, if someone else handles their responsibilities while they're out, their dishonest activities might come to light.
3. The shell game
   
   As money almost constantly changes hands between construction companies and their suppliers, plenty of opportunities for fraud arise. One typical scam involves a dishonest employee who sets up a shell company that outwardly appears totally legitimate but doesn't provide any products or services.
   
   For example, you receive an invoice from XYZ Lumber for job supplies. Unbeknownst to you, the lumber supplier doesn't exist—one of your employees has set it up and deposits the check into his or her own account.
   
   How do you break the shell game? One way is to establish a policy of signing every check (or at least any check above a certain amount). Also require that key documentation, such as the original invoice, purchase order and receiving report, accompany each check. Additionally, appoint an employee who isn't involved in the accounts payable function to mail checks.
4. Good old kickbacks
   
   Some forms of fraud are as old as the hills, and show no signs of disappearing. Take good old kickbacks—a corrupt employee forms a "partnership in crime" with an outside vendor. The vendor representative quotes a higher price than he or she otherwise would and the insider arranges for payment in full. When you pay the bill, the disreputable representative kicks back a percentage of the difference to the accomplice.
   
   To stamp out kickbacks, review invoices periodically to determine whether any orders or prices seem unusually high. Also, insist on the solicitation of competitive bids for contracts over a certain threshold and regularly confirm that such bids were actually sought and received.

Tip of the iceberg

Sadly, these four fraud schemes are just the tip of the iceberg when it comes to ways employees can defraud you. Of course, this doesn't mean you should foster an atmosphere of fear within your company. But strong internal controls, such as segregation of duties within the accounting department and a clearly stated anti-fraud stance, are still a must.

Questions about internal fraud?
Contact Larry Ginsburg at 312-980-2939.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.