Accountants needed to fight fraud on construction projects

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A new report from forensic financial expert Crowe and the University of Portsmouth has highlighted the vulnerability of construction projects to fraud and called for a new role involving accountants to prevent abuse of public funds.

The study comes as the UK presses ahead with a large-scale infrastructure investment programme, making it vulnerable to waste and malpractice.

Problems in construction are nothing new, which is an indicator that fresh ideas are needed to make a difference.

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“Having seen in recent months increased focus and increased funding in the construction sector, now was an appropriate time to look at the sector more specifically,” said Jim Gee, Partner and National Head of Forensic Services at Crowe.

The report says that, as the United Kingdom embarks on a major investment in new infrastructure, it needs to put in place arrangements to get on top of fraud and obtain maximum value for money. It notes that fraudulent losses on HS2 alone could be £4 billion.

The authors say relying on law enforcement to “investigate and prosecute” is inadequate because it only addresses problems after they happen. Similarly, traditional audit is of limited benefit because it focuses on the financial accounts of a single entity in hindsight.

Instead, the report advocates a kind of ethics watchdog for projects, based on the US model of Integrity Monitors.

“This is all about having someone central. There will be a variety of people with different skills – this could consist of accountants, architects and a variety of construction and building experts. Someone will sit at the centre of them and form a team to look at the totality of the project, from inception all the way through to the last brick being laid,” said Gee.

Integrity Monitors examine the whole project, from inception and contract letting to completion. They also promote a culture of integrity and honesty to counter the culture of construction, which the report says can be a building site for fraud and bribery.

Accountants could bring their skills to bear by spotting unusual transaction patterns.

For example, on the extension of the New York subway under Grand Central Terminal an accountant could see 900 employees receiving $1,000 a day on the payroll, but there were only 700 identifiable jobs that needed to be done. The project was one of the most expensive in New York’s history at a cost of $3.5 billion per mile compared to the average of $1.5-$2.5 billion per mile.

The report identifies the following factors that make the construction sector susceptible to fraud and corruption:

  • Political and public pressure on projects – the job must be done
  • Lack of standardisation – no two projects are the same
  • Delays and overruns – unforeseen challenges can be exploited
  • Complex supply chains – many players and moving parts
  • Bid structuring – lowest bid award prompts profit to be sought elsewhere
  • Large costs – obscuring fraud and waste
  • Tough to scrutinise – quality of work can be concealed
  • Local autonomy – providing opportunities for leakage
  • Project management – inadequate supervision
  • Project location – remoteness difficulties
  • Regulatory burdens – red tape bureaucracy
  • Construction culture – corruption, bribes and cartel behaviour more common versus other sectors

The average cost of fraud was found to be 1.9%-10%. On this basis, HS2 fraud is likely to be £4 billion and could be as high as £7 billion.  Over the next five years, the total costs of fraud on infrastructure projects planned in the UK could be as high as £60 billion.

Meanwhile, Integrity Monitors are expected to pay for themselves by producing savings of at least 2% of project costs.

David Nunn is Content Manager at AAT.

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