According to the Association of Certified Fraud Examiners2012 Report to the Nations, fraud is estimated to cost businesses more than $600 billion each year. And the construction industry is one of the industries hardest hit.

But you might think that since you have a small company, it can’t happen to you. Well, think again! It’s not really a question of “if” but “how much.” The median loss incurred by small business is $160,000 — significantly more than the typical loss suffered by larger businesses.

Embezzlement is not the only source of fraud. Employees find plenty of ways to enrich themselves at their employer’s expense, including padded timecards, theft of tools and job materials, personal use of company vehicles, and moonlighting or stealing clients, to name a few.

Limit Opportunity

For fraud to occur, three factors must be present: motive, rationalization, and opportunity. The key to deterrence is breaking this fraud triangle. While motivation and rationalization may not be under your control, opportunity certainly is. Therefore, it is your job to find ways to decrease opportunity and thereby reduce the chances of fraud.

Here are some examples of internal controls — the procedures you can put in place to prevent fraud:

  • Create written policies that outline expectations for integrity and ethics.
  • Create a tone at the top. As the owner of the company, make sure you act ethically and fairly.
  • Take an interest in the books. Ask questions. A bookkeeper who knows that you are paying attention will be less likely to risk mishandling your cash.
  • Never give the bookkeeper check-signing authority.
  • Perform random spot checks on bills, checks, bank statements, and other paperwork.
  • Don’t assign the task of reconciling the bank statement to the same person who is responsible for making checks.
  • Include a third party to review the financial statements and paperwork process.
  • Create a process for employee reimbursements that include all receipts and approvals.
  • Create a process to review timecards, and consider using GPS tracking reports on all vehicles.
  • Inventory large tools and consider requiring carpenters to purchase their own small tools.

While you need to have employees you can trust, it is also important to have a good set of internal controls that you follow. Good internal controls are essential, regardless of the size of your company. You work hard for your money — don’t you want to keep it?

—Melanie Hodgdon, president of Business Systems Management, and Leslie Shiner, owner of The ShinerGroup, co-authored A Simple Guide to Turning a Profit as a Contractor and provide management consulting for contractors.

Related articles:

Down & Dirty Ways to Increase Profits

Failing to Make Necessary Changes Can Drag Down Your Company

Avoid the Vortex: Stop Wasting So Much Time on Email!