Fall 2015 Issue of Horizons

CONSTRUCTION

Taking an ethical approach to the preparation of these statements is key as there will be pressure to inflate earnings in the tough times or sand-bag on jobs to manage expectations. Typically, this is done through jobs in process at a period end by adjusting the expected costs to complete and manipulating overbillings and underbillings. Ultimately, managing earnings is a short-term band-aid to your financial statements as the users (bank and sureties) are sophisticated and can tell when something isn’t right by comparing statements side by side. Presenting statements that reflect the actual status of your company will build creditability with service providers and allow you to properly evaluate the correct course for your business. However, not all controls are created equal when trying to detect and prevent fraud. For instance, the ACFE report showed that an external audit, which is not designed to detect fraud, was performed in 80% of the fraud cases reported; however, the audit only detected the fraud in 3% of the cases. Additionally, fraud detected by an external audit averaged $360,000 per loss and 30 months in duration. Conversely, the majority of fraud was detected through tips to a fraud hotline or management with employees and customers being the leading source of these tips. A fraud hotline was in place for 54% of the fraud cases examined in the ACFE and detected the fraud 42% of the time. Furthermore, the fraud hotline averaged $149,000 per loss and 18 months in duration. Based on this information, it is important not to put too much reliance on a single control, but rather have a series of processes that will prevent and detect fraud.

∙ Obtain ink or electronic signatures on change orders before work begins, and revise contract values accordingly. ∙ Allocate equipment usage to contracts weekly and record equipment maintenance expenses in the ledger as they occur. ∙ Review all billings for timeliness, accuracy, conformity with contract terms and correct customer information. ∙ Reconcile contract billings with general ledgers monthly, and calculate underbillings and overbillings. ∙ Prepare and review financial statements monthly and reconcile them to supporting ledgers, bank statements and loan schedules. Per the ACFE report, management’s review of financial data took place in 62% of the cases examined and caught the fraud 16% of the time. The average loss detected by management’s review was $125,000 and lasted 18 months.

Preparing financial statements on a monthly basis can be very helpful for understanding the health and viability of your business in addition to maintaining a secure control structure. These statements provide you an opportunity to tell your company’s story and are often required by banks or sureties on a quarterly basis in addition to the review or audit required annually.

page 40 | horizons Fall 2015