Shining a light on fraud to protect real estate industry

Switched or shorted supplies at the construction site, phantom orders, inflated prices, payments being made for work never delivered. It's all part of a multi-million dollar parasite on industry called fraud.
The problem is so prevalent that the Quebec government launched a full-scale public commission to learn about the underbelly of fraud, which they have so far found is not only rooted in organized crime, but can make its way up to the politicians and corporate boardrooms.
The bottom line is that fraud is a massive problem plaguing Canadian residential and commercial construction with developers and consumers ultimately footing the bill, concludes a White Paper for real estate companies by Grant Thornton, a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations.
Forensic accountants like those at Grant Thornton spend countless hours looking for evidence of fraud, which isn't always for major sums of money. It is often a compilation of nickel and dime theft that accumulates.
Engage employees and subs in finding fraud
David Malamed, one of the co-authors of the White Paper and a partner in the company's fraud/whistleblower practice, said much of the fraud that happens is easier to spot if employees and contractors are helping with the search.
“Construction fraud and real estate are ranked as the second and third most costly frauds in terms of average loss, billing fraud numbers and in terms of schemes,” he said. “It's a large problem in Canada.”
Malamed said much of the work done by forensic accountants is to uncover construction fraud in government projects, corporate developments and home builds.
The fraud isn't always the stereotype where the construction companies are defrauding individuals or the public, said the White Paper entitled Construction fraud in Canada – Understand it, prevent it, detect it.

Table from Grant Thornton's white paper Construction Fraud in Canada – Understand it, prevent it, detect it
Blaming companies is stereotypical
A group of prominent accounting investigators agrees that the perpetrators are not always companies.
It is often the companies themselves losing money to fraud perpetrated by employees, contractors, subcontractors and venture partners, according to the Association of Certified Fraud Examiners (ACFE).
A study by the ACFE that focused on Canada found that the average fraud case here in construction was $628,500 – higher that the global average.
“It is one of the main themes we see here as forensic accountants,” he said. “The more people and companies become aware of the types of fraud that exist, the more they will be able to prevent themselves from being a victim,” he said in an interview with Property Biz Canada.
Malamed said the fraud tends to be a combination of clever schemes or an accumulation of small amounts being stolen away.
“There are different types of construction fraud that occur. And it you take it to the person, instead of the company, if you believe that you are paying for a quarter-inch of lumber and you get an eighth of an inch, you might not be educated enough to identify the change.”
Malamed also cited the example of a recent fraud investigation that he was involved with where a man took supplies from one of his companies that was doing poorly, and transferred them to a company that had a better profit margin.
“A company that orders a bunch of material to one location needs to determine that yes, we got the right type of lumber and steel and also have to verify that the quantity that we are paying for is the right amount.”
“There's skimming, there's billing for unperformed work where there is collusion with subcontractors in terms of fixing bids – I think there is evidence that at some levels the types of fraud that occur are quite simplistic, but other types take a bit of work to make sure it works for the fraudster.”
The White Paper outlined some of the main schemes used by fraudsters:
* Billing for unperformed work by overstating the units of production accomplished or the labour and equipment actually used.
* Manipulating the schedule of values and contingency accounts.
* Diverting lump-sum cost to time and material cost by initially budgeting expenses as a lump-sum then billing for time and materials related to change orders.
* Substituting or removing material, including using lower-grade material that requires subsequent repairing or replacing or that leads to a structural or system failure, and taking material from the work site for personal use.
* Change order manipulation, including altering work scope, removing scope descriptions, adding charges, omitting design specifications in the original scope of work and improper price reductions for work substitution.
* Falsifying payment applications by covering up the purchase of personal items or funnelling money to a phantom company controlled by an employee; other examples include inflating invoices beyond actual costs by using profit or mark-up formulas.
* Subcontractor collusion, including bid rigging, bribes, kickbacks, false or inflated change orders, undervalued deductive change orders or phantom subcontractors.
* Diverting purchases or stealing equipment
* False representations, such as undocumented workers
Seeking ways to uncover fraud
The White Paper said these are just some of the many ways fraud can happen to any company. The document also outlines ways companies can be vigilant and ways to set up controls to prevent it from happening.
As the industries are regulated provincially, the governments all have different ways of combating the issue.
Last year, in addition to the Charbonneau Inquiry, the Quebec government created a permanent anti-corruption squad called UPAC.
A report from the Ontario General Contractors Association said the program has an annual budget of $31.5 million, and is led by 189 police officers, prosecutors and public servants.
Since greed is one of the main reasons behind fraud, as identified by most surveys, it will continue to happen in any number of industries as it has throughout history.
In construction, it goes back at least to the Roman times, said a recent report from ACFE . Builders found they could make more profit by using less dense marble from the top layers because they were easier to quarry and filled with holes and flaws, which they would patch to make the marble look solid, but without strengthening it.
The process was eventually discovered when buildings collapsed and hundreds died – similar to modern day collapses in sub-standard structures, such as the recent collapse that killed garment workers in Bangladesh.
Stopping crime saves millions
So if fraud isn't going to just go away, it means businesses must find a pro-active way to combat it. One thing businesses should consider is a whistle-blower program to protect themselves from losing millions, or being liable because of sub-standard construction, said Malamed.
“Most frauds are identified through a whistleblower program. Many of the people who are actually on site are unhappy with what they see. They are unhappy that instead of a regular delivery truck, someone has used rented equipment for deliveries,” Malamed said.
“On site, it is the subcontractors who really see what is going on. And if they are unhappy, they want to tell somebody. Maybe not face to face, but they definitely want an outlet to say this is happening.”
“A program like a whistleblower program also acts as a deterrent,” he said.
“Its not just an internal audit that is looking over your shoulder, but it feels like everyone in the organization is looking over your shoulder.

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