Origins of fraudulent activity in the construction industry.
Fraud in the construction industry comes from a variety of sources in a variety of guises, which is what makes it so unique. If you just think about a typical construction project, you’ve got a municipal contracting agency, you’ve got a consulting, design or engineering or architect corporation, you’ve got a primary contractor, you’ve got dozens of subcontractors some of which may also have subcontractors and then you’ve got labor (both union labor and non union labor). All of these pieces come together to create the building or the bridge or the roadway at the end of the project.
As you can imagine, all of these interactions are sources of potentially fraudulent activity. The trick for a CFE working in a large-scale construction project is to somehow keep an eye on all of these moving parts and every particular transaction in it to be sure that fraud doesn’t bubble up to the surface. It’s a very difficult job and it requires a great deal of attention. Both toward the big global picture so that you have an idea where to focus your attention and when and to the intimate details of a particular transaction.
The purpose of an integrity monitor.
Kenneth Citarella, CFE and the Managing Director for Guidepost Solutions LLC, talks about the essential need for an integrity monitor during large scale construction projects. He describes an integrity monitor as “a highly skilled organization composed of people just like CFEs who contract with the public contracting agency (the entity that owns the road construction or the bridge repair or the convention hall construction) and their job is to sit on top of the construction project to watch all of the players and to observe what goes on and to be sure that the transactions are clean and appropriate.”
The Integrity monitor will simply observe the whole process to be sure that all tasks are completed according to specifications, to be sure that the field inspector acts according to his or her specifications and to be able to report back up the line to the contracting agency that from an Integrity point of view they can have confidence in what has been accomplished. The integrity monitor in no way second guesses the engineers or tries to do their jobs, but more specifically it focuses and takes a look at the whole Integrity of the process.
A fixed-price contract creates financial certainty and transfers risk.
A fixed price contract (also known as a lump sum contract) is where a public construction agency puts out a request-for-proposal (RFP), for example, for the repair of a bridge. Contractors then respond to the RFP, informing the agency that they will do all the work described in the project on time and for a fixed price unless any unforeseen circumstances may occur.
The purpose behind the fixed-price contract from the public agencies point of view is that it’s an attempt to transfer the risk to the contractor so the risk becomes the contractors if a subcontractor does something wrong and is performing sub-optimally. These additional expenses have to be borne by the contractor not by the public contracting agency so it’s an effort to create financial certainty for the contract agency and to transfer the risk to the contractor.
The construction industry has so many potential possibilities for fraudulent activities and is a huge challenge for any CFE or integrity monitor to oversee and monitor. The key is to have complete knowledge of both the micro and macro elements of a particular project and to make sure risk is transferred accordingly.
Notes：This essay is excerpted from ACFE website.