No industry is free from the threat of fraud. This is especially true in the real estate and construction space, where the consequences of falling victim to fraud can have long-lasting and far-reaching impacts.

Fraud comes in many forms, both obvious and unexpected, making vigilance and oversight of your operations so important. According to the Association of Certified Fraud Examiners (ACFE), fraud cases typically last up to a year before they are detected and cause a median loss of $117,000. 

In a 2022 report, the ACFE found the real estate and construction industries ranked number one and number four respectively in the top five highest median losses by industry. The average loss in real estate is US$435,000 and US$203,000 in construction. 

In the U.S. and Canada, corruption is the biggest culprit of fraud, representing 37 percent of cases examined in the study, followed by billing, theft of noncash assets, expense reimbursement, and payroll. 

Most organizations that have strong anti-fraud policies in place have been the victims of fraud in the past. Being proactive when it comes to fraud protection will save you time and money and provide peace of mind knowing you’ve taken steps to ensure your business’ safety. 

Signs of fraud to be on the lookout for

Given the detailed and complex nature of real estate and construction acquisitions, this is typically where fraud is identified. Potential culprits include suppliers, contractors, third party agents, and employees. 

Whether you’re a real estate agent, own a construction company, are an institutional investor, or a property manager, there are some common red flags that can give general and consistent insight into how to spot fraud.  

• Employee behaviour: High employee turnover should be an indication that something’s not right. Employees may leave shortly after arriving if they see problems in the culture of the organization (such as weak internal controls) or if they’re afraid of being caught.
• Differences between actual and expected results: If your account balances are lower than expected or there are consistent inaccuracies in your inventory, investigate further.
• Overly complex structures: In businesses with complex structures and multiple levels of management, it’s easier for fraudulent activities to go unnoticed.
• Frequent reversing entries: Reversing entries in accounts payable or receivable must be taken seriously. Complicated entries could also be used as a cover to hide something more nefarious.
• Reconciliation problems: If you’re missing expense vouchers or invoices, and their supporting documents, this might be a sign that something is amiss.   

Trust your gut. If something doesn’t feel right, take the time to investigate and use the opportunity to examine any areas for improved protection.

Fraud prevention is about knowing your weaknesses and the parts of your business that are most susceptible to fraud. Using that knowledge to take steps to alleviate those weaknesses and develop appropriate internal anti-fraud controls will help combat the risks they might pose. 

How to reduce the risk of fraud 

Across industries, environments ripe for fraud are typically defined by lack of or weak internal controls. Unique to the real estate and construction space, things like poorly designed or defined project scope and poorly worded contracts can quickly add to that risk. 

Regardless of the size and scope of your operation, there are universal ways to bring down your risk of becoming a victim of fraud including: 

• Establish a strong set of fraud risk governance policies and procedures
• Obtain fraud risk assessments
• Collaborate with external advisors
• Design and deploy fraud prevention and detection control activities such as the establishment of a hotline or other reporting avenues
• Conduct fraud investigations or forensic reviews
• Monitor and evaluate the effectiveness of the fraud risk management program 

Cybersecurity and anti-fraud training

Cybersecurity should not be underestimated or forgotten when determining fraud risk and developing an anti-fraud system. Many professionals don’t realize how much information they have on their clients and customers. Even small real estate investors and landlords can have a significant amount of identifying information, like clients’ addresses and social insurance numbers, that can easily be used to commit fraud. 

Training employees to spot phishing attempts, ensuring strong password usage, multi-factor authentication, and keeping software up to date are a few ways to mitigate risk. 

You know your business best. Any level of fraud risk is too high but in the real estate and construction industry, research shows it’s short-sighted to be without formal policies or an anti-fraud plan to protect your operation. 

Our Real Estate and Construction professionals are here to help you learn more about the unique risks you might be facing in business and to establish a system to safeguard your future from the threat of fraud.

Contact Corey Anne Bloom, FCPA, CPA•IFA, CFF, CFE, ACFE Regent Emeritus, Eastern Canada Leader, Forensics and Litigation Support, corey.bloom@mnp.ca