Fraud is endemic in the construction industry. So much so that in many parts of the world it is seen merely as a ‘cost of doing business’. But this does not have to be the case. In a report released this week, ‘Time for a new direction – Fighting fraud in Construction’, we recommend a number of concrete steps companies can take to avoid becoming victims of fraud.
But first, let’s explain the scale of the problem. Fraud can take many forms, from falsely representing the numbers of hours a contractor works, through to collusion when bidding for contracts and the payment of bribes to secure a contract. By some estimates, such practices account for 5 to10% of global sector revenues. At the upper end of this range, fraud could be costing businesses almost US$1 trillion, rising to US$1.5 trillion by 2025. These are extraordinary figures. Imagine what this sum of money could do to boost sector growth if reinvested, rather than written off as ‘wastage’.
But the impact on profits is only one part of the problem. A company’s reputation can also be damaged. Strong brands take many years to build. But they can be destroyed in seconds. Corrupt and fraudulent practices can hit stock market value and lead to companies being barred from bidding for certain projects, especially in the public sector.
Of course, the flipside to this is that companies are often reticent to admit to fraudulent activity precisely because of the reputational damage it causes. More on this later.
So what do we recommend? Firstly, make use of the technology available. The real estate and construction sector is a decade behind the curve in terms of the adoption of technology in the detection and prevention of fraud. The contrast with the finance sector, which has reacted to cybercrime and money laundering threats by using technology, is not flattering. Business leaders should tap into publicly available data to surface bogus contractors and adopt tools such as e-auctions to prevent collusion.
Secondly, encourage whistleblowing. We estimate that this practice unearths close to 50% of investigated fraud cases, but that it is far more common in the public than the private sector. Whistleblowers should be able to act with complete anonymity. And policies should allow employees and third party suppliers to raise concerns with confidence and impunity.
Implementing both these recommendations requires senior management involvement. The detection and mitigation of fraud should be on your Board’s (or equivalent) agenda. They need to understand that whilst sweeping fraudulent activity under the carpet may appear to be the best option in the short-term, in the long-term, allowing the perpetrators to walk away will weigh on sector growth prospects. As controls and oversight improve, it may also come back to bite them.
The message from our report is clear: companies need to pull their heads out of the sand. They need to recognise that fraud and corruption hit both profitability and reputation. If not, growth will suffer -today and tomorrow.
Clare Hartnell is Global leader for real estate & construction at Grant Thornton.