How are the top construction companies building proactive counter fraud strategies?

15 May 2017

Recent media coverage suggests fraud in the UK construction industry has never been more prevalent. Cases of bribery, cash-for-contracts, procurement scams and other alleged wrongdoing in the sector have hit the headlines in the past few months.

The direct costs of such fraud, recently estimated at £2 billion a year, however, are just the tip of the iceberg. Add on the knock-on effects such as reputation damage, omission from tender shortlists and increased difficulty in recruiting talent, and the real costs are probably several magnitudes greater.

Why? Because fraud in any industry is fuelled by the “triangle” of opportunity, pressure (motivation) and rationalisation. And the construction industry has several characteristics that make it especially fertile ground for fraud:

  • The huge sums of money involved in construction projects and every interface where money changes hands presents opportunities for fraudsters.
  • Construction projects, and the supply chain that supports them, are highly complex, with a myriad of material and labour. So it’s easy for anomalies to get buried in the detail (for example, of a tender reconciliation), or even deliberately hidden.
  • Checks, balances and decisions in construction are widely distributed at a local level, making them more fragmented and harder to track than in other procurement-intensive industries such as car manufacturing.
  • Construction projects’ headlong pace, intense time pressures and direct interdependencies mean it’s not always easy to make time for rigorous background checks.

Beneath these industry-wide causes of fraud vulnerability, there are also secondary  drivers that can apply at a company level. Factors like continued use of manual and paper-based processes, rapid turnover of staff, and a business culture where people may not feel confident reporting concerns.

What’s more, if a fraud does happen these days, you can be sure people will hear about it, and remember it. In the internet era bad news travels fast, and stays linked with the business in every web-search for years to come. Part of the reason why the immediate financial losses may just be the start of the real costs.

So, what to do? We’ve identified six areas where leading construction companies are progressing from a reactive counter fraud strategy to one that combines reactive with proactive elements. They:

  1. Regularly test the procurement process and controls and benchmark against industry standard. This can be covered as part of the regular fraud risk assessment across the business.
  1. Maintain a programme of detailed project/supplier audits (we’ve seen companies use either their internal audit function or external advisors) that test the procurement process and independently confirm to third party documentation.
  1. Test the culture and seek to understand staff awareness of the dangers and knowledge of how to act on them. There are a number of third party solutions to assist with this exercise including our Spotlight culture assessment tool.
  1. Train and raise awareness. Consider experiential training in relation to the code of conduct that makes it real and promote personal responsibility. A useful approach here is to learn from industries such as financial services, and set out easily-understood and identifiable “red flags” that staff can watch out for in contract and procurement agreements.
  1. Are proactive on supplier due diligence and have ongoing supplier management. They combat potential conflicts of interest with a supplier diligence programme which stays up to date. PwC’s RADAR offers such a service by continually monitoring a wide variety of external data sources.
  1. Plan the reactive response bydeveloping protocols that consider roles and responsibilities, legal implications and external advisors, stakeholder communication strategy, issue triage and data capture. Practice through simulation is essential, either with ready made (Investigate, Game of Threats) or tailor made scenarios.

The right degree of compliance “disruption” to business-as-usual is a delicate balance and constantly evolving, however, amongst the companies we are working with who are actively addressing these areas , one thing is clear: taking action now is better than counting the cost later.

Please get in touch with us to find out more.

 

Jonathan Holmes | Partner


Jonathan is a chartered accountant who specialises in investigations and forensic contract reviews.
Email | +44 7809 755613
More articles by Jonathan Holmes

Jonathan Roe | Director


Jon is a Chartered Engineer, specialising in the procurement and delivery of major construction projects.
Email | +44 7711 589088
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Pierre-Edouard Pichot | Senior Manager


Pierre-Edouard is a chartered European Engineer and certified Project Manager who specialises in the set-up, delivery and review of complex capital projects.
Email |  +44 7725 632531
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