February 23, 2006
Author: , CPA
“If you make it easy to steal from you, chances are someone will,” observes security consultant Frank W. Abagnale. And he should know.
Abagnale, who devotes himself these days to educating the public about fraud risks, is the one-time con artist portrayed by Leonardo DiCaprio in the recent movie “Catch Me If You Can.”
You may not think it’s easy for employees to steal from your construction business, but you may be easing the way for the sticky-fingered with careless management practices. Such practices might include sloppy financial procedures or inattentive supervision. They may even involve lapses in professional behavior or shortcomings in ethical practices at the management level.
On the other hand, conscientious attention to good management practices reduces the risk of employee fraud. Beginning with the recruitment and hiring process, effective fraud prevention must be built into every part of your company’s operation.
Check References
Obtain and confirm references for new hires, checking their work experience as well as their educational background. It’s a good idea to check for criminal records, even if you need to hire an outside investigating firm. The front-end investment may well save you money and aggravation down the line. Another early precautionary step is blanket bond coverage for new hires, to protect you in case the employee hightails it with company cash or valuable tools or equipment.
Vigilance should not wane after the hiring stage, as even trusted long-term employees can develop larcenous ways, given the opportunity, if they have a motive and a way to excuse their behavior to themselves. A motive to steal may come from an urgent need for money, from simple greed or from un-resolved grievances against the company. Alert managers may spot warning signs in employees confronted by these pressures.
Watch Spending Habits
If employees begin spending way beyond their means — driving flashy cars, taking expensive vacations or making costly home improvements — take note. Or, you may spot signs of extreme financial pressure growing from personal difficulties such as excessive debt, medical expenses, marital difficulties or gambling problems. Personal behavior exhibiting edginess, sudden mood swings or substance abuse problems can provide another red flag.
Warning signs in job performance include close ties to particular vendors, sudden switches to new vendors, strong resistance to record-keeping changes and sloppy record keeping with multiple changes.
Employees who won’t take vacations may be worried that someone will discover their dishonesty. Those who arrive before everyone else and stay after others have gone home may not be as diligent as they seem; they may be looking for solo time with important records.
Holding a Grudge
Employees with a grudge against the company — growing out of a reprimand, a dispute with a supervisor or a cutback in pay or benefits — may see theft as a way to settle the score. Listen for signs of resentment and watch bitter workers with special attention.
Sticky-fingered employees cost American businesses $600 billion annually, according to the Association of Certified Fraud Examiners, with the heaviest losses to small businesses. Median annual losses in companies with 100 or fewer employees run $127,500, compared to $95,000 for large companies.
You can’t completely eliminate your company’s employee fraud risks, but with careful management, you can make it a lot harder for your employees to steal from you. We can help you design effective internal controls to reduce the risk of employee fraud.
Tool Tracking Yields Significant Savings
The hefty costs associated with front-end loaders, digging machines, and other specialized construction equipment are well known. It’s no surprise, then, that construction firms pay close attention to the cost and maintenance of these machines. But all too often, comparatively lower-priced smaller tools and materials are overlooked.
In reality, however, these costs are anything but insignificant. In fact, failure to utilize small tools efficiently and keep track of their whereabouts results in unnecessary losses for contractors year after year. Addressing this problem can provide big returns for relatively little investment.
Securing the Site
The first step that all contractors should consider is security at the job site. It’s unlikely that someone will drive away with a slow-moving bulldozer, but the temptation to steal smaller tools or materials is ever-present.
A formal policy should be created to clearly outline what is permissible (e.g., use of company vehicles) and what constitutes theft (e.g., taking "scrap" materials). In addition, begin each job by collaborating with subcontractors and on-site personnel to develop a security strategy, much in the same way that safety issues are addressed. Subcontractors often contribute some of the best ideas because they’re closest to the day-to-day activities at the job site.
Law enforcement agencies should also be apprised of work schedules so that they know what activities are scheduled for day and night shifts. Consider establishing an anonymous tip line to discourage and thwart tool theft. Other precautions include:
- Installing adequate lighting for evening work
- Using secure fencing where appropriate
- Limiting access to material receiving areas
- Establishing key-control procedures
- Establishing guidelines for using a security service
- Posting signs to discourage theft
Tool-Tracking Software
New technologies are also available to help eliminate small tool losses. Several software programs and bar-coding products can accurately track smaller items. This technology not only deters theft, it also enhances efficiency by combining aspects of inventory control and accounting systems. It lets the general contractor know who has what tool, how that tool is being used, and for how long. The comprehensive reports these databases create help contractors analyze how equipment and materials are used, often revealing new ways to share tools more efficiently, or to handle and store critical materials to minimize downtime.
If you have any questions or would like more information on how to help keep your company secure, please contact Terry Grant, CPA, CCIFP, at 410-828-6432 or [email protected]. Terry is a shareholder at KAWG&F, P.A. a regional certified public accounting and consulting firm headquartered in Timonium, MD. Terry is a member of the firm’s Construction & Real Estate Services Group.