Building Your Knowledge of Construction Fraud

Everyone’s had some experience with construction, whether it’s making repairs around the home, hanging a picture or assembling a Lego set. But just because you’ve picked up a saw or hammered a nail into a wall, you aren’t an expert on construction, Wayne Kalayjian, CFE, PE, told attendees in his early Tuesday morning session, “The Money Pit: Tales of Construction Fraud and How to Prevent It.” As Kalayjian explained throughout his session, construction is a complex field. A fraud examiner without the requisite construction knowledge might as well visit a building site without a hard hat.

As Kalayjian explained to a standing-room only crowd, knowing what you’re talking about is essential to fighting fraud in construction. You must know the specific terminology to properly investigate all the possible schemes that occur in this $11 trillion-worldwide industry. One humorous example from Kalayjian to demonstrate how knowing the terms will help you navigate the industry is the difference between cement and concrete. (They’re not the same thing.) “If you talk to a contractor about cement, they’ll know you don’t know what you’re talking about,” joked Kalayjian, a professional engineer and 40-year veteran of the industry

Construction is among the largest industries in the world, and within an industry that employs 11.2 million people (8% of the world’s workforce) and makes up nearly 10% of global GDP each year, there’s vast potential for fraud. Kalayjian, who is managing director of international construction consultancy Secretariat International, said the potential volume of fraud is an estimated $1.2 trillion. Because of the industry’s size, the many multilayered processes and activities, and the enormous sums of money pumped into the projects, construction has a well-earned reputation for fraud, he said. And there are many, many ways to do it. These include corruption, asset misappropriation, false claims and billing schemes. “Construction really gets its reputation from billing schemes,” said Kalayjian.

Kalayjian provided 34th Annual ACFE Global Fraud Conference attendees with a blueprint for understanding fraud in the construction field with lists of the many terms specific to the field, the documentation required for projects and procurement and the many types of schemes that occur within the field. Peppered throughout his session were specific cases of construction fraud to demonstrate the most common schemes you’ll encounter in the field. One such case was a highway project in the Midwest in which a public company misrepresented the numbers on its balance sheet and didn’t accurately reflect overrides. The numbers on the balance sheet conflicted with the company’s internal reports, which showed it was bleeding money.

At the end of the session, attendees could walk away with a better understanding of what it takes to investigate fraud in the construction field. Familiarizing themselves with intricate project management practices and processes and the terminology that contractors use on the job are the keys to success for fraud examiners, according to Kalayjian. As he told attendees, if you’re working on a case and need to access certain documents, you better know which ones you’ll need to get.