1. P R E S E N T E D B Y :
R A C H E L V I L L I C A Ñ A , C F E
Construction Industry Fraud

2. Professional Background
 Certified Fraud Examiner
 LEED AP; Certified Associate Project Manager
 6 years of Industry-Related Experience
 President of Radii Consulting
 www.radiiconsulting.com
 Speaker at UCB 2012 Leadership Symposium:
“Entrepreneurship” Panel
 MA- Forensic Psychology; UC Berkeley Alumna

3. I N D U S T R Y B A C K G R O U N D
C O M M O N F R A U D S C H E M E S I N T H E I N D U S T R Y
F R A U D R I S K S S P E C I F I C T O C O N S T R U C T I O N
F R A U D R I S K A S S E S S M E N T S
C A R E E R S I N T H E F I E L D
Overview

4. Construction Industry Statistics
 Nationwide
 Annual Revenue:
 $1.731 Trillion
 Active Companies:
 729,345
 Number of Employees:
 7,316,240
 (April 2012, US Census
Bureau)
 Statewide
 Annual Revenue:
 $171.369 Billion*
 Active Companies:
 72,173 (9.9%)
 Number of Employees:
 723,978*
 *Based on 9.9% rate

5. Estimated Annual Fraud Loss in Industry
 Based on the ACFE‟s 2012 Report to the
Nations, CFE‟s nationwide estimate a 5% annual loss
in revenue due to fraud.
 5% of $1.731 Trillion: $86.55 Billion in potential
projected annual losses;
 5% of $171.369 Billion: $8.57 Billion in potential
projected annual losses in California.

6. Financial
Statement
Fraud
Timing Differences
Unauthorized
Expenditures
Misclassified
Expenditures
 Timing Difference Scenario:
Harry Johnson of ABC
Builders altered the date of
transactions to adjust
financial statements to ABC‟s
advantage.
 Tax purposes- lower annual net profit.
 Lending/Banking purposes- increase
assets; decrease liabilities.

9. Contract
Fraud
Defective Pricing
Product Substitution
 Defective Pricing Scenario:
Georgia Sanders from 123
Construction submitted low
bids to obtain jobs.
 She knew her company would lose
money if they performed these projects.
 Expected to recover losses through
forced change orders.

10. Investigating the Scenario:
 Original contract value was $1,000,000. Final costs
to client were billed at $1,500,000, with no
significant change of scope.
 Review of correspondence with client to determine whether
change orders were approved.
 Review of project costs- invoices from suppliers, field
labor, and overhead charges.
 Review contractor‟s financial statements and current credit
situation, determine whether there‟s motivation to defraud the
client.
 Conduct interviews with field foremen- were these additional
costs due to significant changes in field conditions/availability
of materials.

11. Bid Rigging
Bid Rotation
Bid Suppression
Complementary
Bidding
Collusion
 Case Study:
 At UC Berkeley:
 3 mechanical subcontractors have
blanket work authorizations
 These subs are directly awarded jobs on
a rotational, yet bid-based cycle
 Subs are known to engage in bid rotation
and suppression, since they are all
friendly.
 However, they want to maintain a
positive, long-term relationship with the
owner.

14. Payroll and
Labor Fraud
Undocumented
Employees
Ghost Employees
Labor Mischarges
 Case Study:
 John Smith, owner of
Construction, Inc., anticipated a large
profit from a $1,500,000 contract.
 He purchased materials with company
funds and sent two employees to
perform construction work on his home
during weekend hours.
 The employees were directed to bill this
time to the contract mentioned above.

17. Financial Statement Fraud- Resources
 Utilize in-house software reports
 Ex. Quickbooks reports:
 “Audit Trail”
 “Voided/Deleted Transactions Detail”
 Audit tax returns
 Corporate returns
 Personal returns of shareholders/officers
 Review bank and credit card statements
 Examine credit account applications
 Compare printed copies of financial statement reports
 Third Party Information- CPA, Enrolled Agents
 Employee Interviews

18. Contract Fraud- Resources
 Project file audits
 Compare contract drafts
 Research available correspondence
 Emails
 Voicemails
 Employee interviews
 Customer interviews
 Third party information
 Suppliers
 Subs
 Competitors

19. Bid Rigging- Resources
 Employee Interviews
 Third-party interviews
 Review bid documentation
 Audit original project (bid) file
 Research correspondence
 Emails
 Voicemails
 Gather related bids
 Subcontractor bids
 Competing contractors.
 Obtain bid results from public agencies.

20. Labor Fraud- Resources
 Audit employee files
 I-9; W-4
 Background investigations
 Audit payroll summaries
 Review cancelled checks
 Review Worker‟s Comp insurance reports
 Audit insurance files
 Compare certified payroll reports against in-house payroll
summaries
 Employee Interviews

21. Why Assessing
Risk Matters
Fraud Prevention
 Realize Larger Profit Margins
 Maintain Positive Reputation
 Maintain Business Relationships
 Improve Company Efficiency
 Avoid Legal Repercussions

22. Why Assessing
Risk Matters
Fraud Detection
 Mitigate further losses
 Recover some losses
 Improve company relations
 Problem Solving
 Conflict Resolution
 Involve law enforcement
 Lessen corporate responsibility
 Accountability for the blameworthy
 Regain control of company

23. Fraud Risk Assessment Modules (ACFE)
 Employee Assessment
 Management Assessment
 Physical Controls-
Deterrence
 Skimming Schemes
 Cash Larceny
 Check Tampering
 Cash Register Schemes
 Purchasing/Billing
Schemes
 Payroll Schemes
 Expense Schemes
 Inventory/Equipment
Theft
 Theft of Proprietary Info
 Corruption
 Conflicts of Interest
 Fraudulent Financial
Reports

24. Fraud Risk Assessment- Case Study
 Fraud Risk Assessment- Assessing whether fraud may be
occurring and what vulnerabilities do exist.
 Case Study: Orange River Construction
Vulnerabilities
Shop Keys
Key Lockbox- client keys
Signature Stamp
Checkbook and Drawers
Employee Opportunities &
Motivations
Identified Fraudulent Activities
Financial Statement Fraud
Undocumented Laborers
Defective Pricing
Forgery

25. Skills Utilized Tools and Techniques
 Observation Skills
 CFE Knowledge
 Critical Analysis
 Industry Knowledge
 Administrative
Background
 Interpersonal Skills
 Basic Computer
Forensic Techniques
 Interviews
 Checklists
 Historical Data
 Third Party
Information
 Public Records
Assessing Orange River Construction

26. Orange River: Identified Risks and Frauds
 Employee Assessment
 Management
Assessment
 Physical Controls-
Deterrence
 Skimming Schemes
 Cash Larceny
 Check Tampering
 Cash Register Schemes
 Purchasing/Billing
Schemes
 Payroll Schemes
 Expense Schemes
 Inventory/Equipment
Theft
 Theft of Proprietary Info
 Corruption
 Conflicts of Interest
 Fraudulent Financial
Reports

27. Orange River, Specific Examples
 Employee Assessment- majority of employees are
unhappy at this company.
 Management Assessment- President has history of
„burned bridges‟, unaccommodating personality.
 Physical Controls- lack of security at shop.
 Payroll Schemes- overtime not paid to particular
employees; ghost employees receiving health insurance.
 Conflicts of Interest- President‟s landlord is company‟s
tenant and landlord‟s company is contractor‟s
subcontractor.
 Fraudulent Financial Statements- Timing Differences.
 Signs of Contract Fraud- excessive proportion of clients
on payment plans due to overbudgets.

28. Preventive Measures
 Know current and pending regulations.
 Company policies
 Code of Ethics
 Fraud Prevention and Detection Policies
 Whistleblower Protection Policy
 Social modeling- strong values of senior
management.
 Legal counsel, external advisors (including a CFE).
 A) Regular and B) unplanned audits.
 Mandatory vacations.

29. Career Opportunities
 Work within the Industry:
 Become a Project Risk Management Professional (PMI Certification)
 Join a Large Company
 Legal Division
 Financial Counsel
 VP
 Join a third-party service company:
 Consulting firm
 Forensic accounting firm
 Construction litigation firm, etc...

30. Or….Be Your Own Boss
 Become an independent consultant:
 Your value-added:
 Stronger credibility when defending against litigation or criminal
accusations.
 Higher degree of trustworthiness when banking and lending are
involved.
 Few industry competitors.

31. Consulting Tip
 Develop relationships
 Networking:
 Industry Events
 Conferences
 Chapter Meetings
 Board positions on large companies
 External advisor for small companies
 Volunteer to Lead Workshops
 Fraud Risk Awareness Trainings

32. One More Tip…
 Offer (free) Fraud Risk Assessments!
 A Fraud Risk Assessment can reveal multiple areas of
vulnerability in a construction company.
 Offering an Assessment can lead to obtaining a contract to
provide risk mitigation services.
 These services allow you to better network within the industry:
 Provide great service to a general contractor- you may obtain
access to its industry network of clients, suppliers, and
subcontractors.

33. Resources
 Fraud Examiners Manual- 2011 edition: www.ACFE.com
 Managing the Business Risk of Fraud:
http://www.acfe.com/uploadedFiles/ACFE_Website/Content
/documents/managing-business-risk.pdf
 Sample Fraud Risk Assessment from ACFE website:
http://www.acfe.com/fraud-risk-assessment.aspx
 California Infrastructure Projects-
A Guide to Successful Contracting and Dispute Resolution:
http://constructionlawyers.com/CM/book/table_of_contents
.html
 Bid Rigging (from California Contractor magazine):
http://www.agc-ca.org/uploadedFiles/Publications-
Products/Constructor-Mag-PDFs/March2010.pdf