In the remodeling industry, fraud comes about almost exclusively as the result of worker misconduct — generally theft of materials and/or leads and embezzlement. Numerous studies have shown that 80% of workplace crime is committed by employees, and 25% of employees who commit fraud have been with the company for 10 or more years. Think about that carefully — it will give you a different perspective on your workplace. Here are four of the more important safeguards to protect against fraud:

  • Forensic auditing: Bring in an outside CPA firm twice a year to conduct a forensic audit and “true up” a one-month period of time on your books, ensuring that cash flow, job deposits, bank deposits, and journals, etc., all match up. The goal is to track the flow of monies on a series of jobs. The typical embezzlement occurs when customer checks are being taken from inside the company and deposited into the embezzler’s own account, which may have been set up with a business name similar to that of your company. The next most frequent embezzlement scam is where small checks are written out to the embezzler or to a cohort for ongoing false bonuses or expense reimbursement requests. The forensic audit often can identify these issues.
  • Segmented personnel: Simply put, whoever does your internal bookkeeping should not be the same person receiving company checks and making deposits. Separate these functions.
  • Insurance coverage: Ensure that you have adequate employee dishonesty insurance (also referred to as fidelity bonding or crime insurance). We suggest coverage equal to 15% to 20% of annual volume. Make sure that the coverage applies to your weak areas (for example, that seasonal workers, 1099 workers, partners, part-time workers, etc., are covered under the policy if you are exposed in those areas). Ensure the coverage extends to the following:

—Forgery/alteration

—Theft/robbery

—Fund transfer fraud

—Computer fraud (lead database theft)

—Credit card fraud

—ERISA (retirement plans, if applicable)

  • Snitch policy: We suggest instituting a clear theft policy whereby you offer a reasonable reward (perhaps $1,000) to any employee who notifies you of a theft or other illegal activity occurring at the company. Make clear that failure to report illegal activity is in itself grounds for immediate termination if not also being charged with aiding and abetting a crime. (Studies have indicated that offering more than $1,000 or so does not increase reporting effectiveness.)

To make a security policy such as this effective, it is crucial that employees know that they can turn over incriminating information on anyone in the firm without fearing job loss or other repercussions. The policy should stress that management and supervisors are not above suspicion and that employee complaints will be taken seriously. Consider having a dedicated email address or phone number for workers to leave anonymous tips. —D.S. Berenson is the Washington, D.C., managing partner of Berenson LLP, a national law firm specializing in the representation of contractors and the home improvement industry. Contact him at 703.759.1055 or info@BerensonLLP.com. This article is for informational purposes only and should not be construed as legal advice.

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