Fraud in construction is commonplace, multi-faceted and is costing the UK industry billions, according to a report published this week by forensic experts at Grant Thornton.
The report, a supplement to the business advisory firm’s global report, Time for a new direction: fighting fraud in construction, adds to the worrying assessment of industry probity in last month’s CIOB survey, Corruption in the UK Construction Industry 2013.
The report cites a report from the Chartered Institute of Loss Adjusters in 2011, which estimated that fraudulent payments in construction could cost the industry up to 10% of its revenues.
Prevalence of different types of fraud in the UK
It refers to a 2012 survey of members of the Chartered Institute of Purchasing and Supply, under the government’s Annual Fraud Indicator assessment, where 40% said that construction was at greatest risk of procurement fraud.
And it quotes Transparency International’s Global Corruption Barometer 2013, which showed that 65% of respondents considered that levels of corruption across the general economy had increased in the UK in the past two years.
Grant Thornton concludes that UK construction businesses and clients are at high risk of being defrauded through bid/contract rigging or collusion, and change order manipulation, although theft or material substitution is classified as medium risk.
Johnson: “board agenda”
Examples of fraud cited in the report include the manipulation of percentage completion schedules, triggering early payments, and change order and add-ons introduced post-tender award.
In one case, stage payments were made to a falsified recipient company rather than the actual contractor, leading to a £680,000 fraud.
Speaking to CM, Grant Thornton partner Sterl Greenhalgh and director Colin Johnson said they had come across a far simpler fraud perpetrated on a client, who had paid for the same wall to be repainted seven times.
Johnson said: “One of the key points is that cyber security is the buzz word, it always appears to be in the media and dominates boardroom discussions. The more traditional forms of fraud get pushed down the agenda, but potentially the amounts involved are considerable.
“Businesses need to get it onto the board agenda, and bring in a methodology to mitigate the risks.”
Greenhalgh: monitor
Greenhalgh said that many Grant Thornton clients typically insist they do have robust payment authorisation procedures in place, but fail to actively monitor their effectiveness, or appoint an external auditor to challenge their internal processes.
“Yes, you’ve got the procedures in place, but are people following them? You might have a system where cheques are pre-signed because the right people aren’t in the office, or there might be a system where someone has to approve 35 invoices on an Oracle system.
“So they hit ‘authorise’ – but have they looked at the supporting documents? Then the second signatory thinks ‘I trust my colleague’ and does the same thing.”
He suggested that Twickenham’s hospitality suites will be full of construction suppliers hosting construction buyers in the coming weeks. “Once you’re a bit pally with someone, you’re compromised,” he warned.
Read Graham Hand’s comment: Why we’re no more ethical than anyone else
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Once again another report indicating the prevalence of fraud and corruption in the construction sector. I have read the Grant Thornton International report. It is a pity they limited it to the western countries. Inclusion of a typical developing country like Zambia would have been most welcome as it would highlighted even new areas in fraud and corruption.
I still insist that only the introduction of regular technical auditing will reduce fraud, corruption and mismanagement of the sector particularly in the developing countries.
Dear Bwalya
While you are right about the link of poor contract management to corruption and fraud, unfortunately you are wrong about its presence limited to developing countries. In matured economies and in big mining companies especially such practices are rife at all levels but somehow condone or even covered up for fears of public outrage and its impact on share prices. Corrective actions are always hush hush and come too late – another reason why the same culprits carry on in their next gigs even when caught out. The more things change the more they remain the same.