Construction Fraud Is More Common than You Think
Not only is construction one of the most common industries to find fraud, it often happens totally by accident. Two common reasons for this are 1) the company only has one person doing the accounting, and 2) the owners/executives are not involved enough in the accounting process.
These are the insights of Nicole Landau, an accountant who specializes in accounting and fraud in the construction industry. In this episode, Nicole discusses the best practices for avoiding fraud, and tells a few stories of common types of fraud she has seen in her career.
Nicole gives tips on how to avoid construction fraud, how to plan your budget, and provides some excellent free resources to help you audit your own business for signs of fraud.
Learn all about it here on Builder Funnel Radio.
- 0:40 Episode introduction
- 1:24 Nicole's background
- 3:25 Biggest accounting mistakes Nicole sees often
- 5:29 Why budgets are important, and how to approach making one
- 8:46 Thoughts on growth budgets
- 11:13 Construction fraud and why it's so common
- 14:22 Why the owner should be involved in accounting
- 15:37 Common hiding places for construction fraud
- 18:36 An example of signs of potential fraud
- 20:47 Fraud risk assessment checklist
- 24:00 Connecting with Nicole
- 24:55 Fast Five
- 26:54 Spencer's takeaways
- Nicole's LinkedIn profile
- Building Borders: Fraud Prevention for Small Businesses free eBook and checklist
Full Episode Transcription
Note: this podcast was transcribed automatically and may contain minor grammatical errors or missed words.
Welcome to builder funnel radio here you'll learn about how to grow your home building remodeling or contracting business. If you're not growing, you're moving backwards. So we want you to always be in growth mode. This podcast has really turned into a movement and community of people who want to grow personally and professionally. Here we bring you some of the best marketing sales and business minds in the industry, so you can elevate your business. All right, let's dive into the show. Hey guys, welcome back to builder funnel radio. This is Episode 73 with Nicole Landau And today, we do a deep dive into both budgets as well as fraud and that's something Nicole has been digging into a lot lately. And it is amazing how prevalent fraud is in the construction industry. So I really hope you guys Listen to this episode and get a lot out of it. She provides some really good tips for you guys to do a quick check on how you're doing in some of these areas and how exposed you might be to some risk of potential fraud. And she's also got some resources for you at the end. So, sit back and relax and enjoy Episode 73 with Nicole Landau. Hey, Nicole, glad to have you here today.
Hi, Spencer. Thanks for having me.
Yeah, I'm excited, because we are going to dive into what I think are some really important topics but maybe not often talked about, but I don't know kind of an ominous forecast there, I guess into what we're going to talk about. But before we get too deep in the weeds, I guess, give people a little sense of your background and kind of how you got into the construction world as well.
Absolutely. So I at one point in my career, I thought I might be an architect is kind of the path That I went down, I took every woodworking and CAD drawing class and really wanted to pursue that. But I had a professor come to me, I needed to pick up a few extra credits and she was the accounting teacher at that time, and was like, Hey, I think you should take my classes, I think you would really like them and you would excel in them. So I took them and absolutely fell in love the numbers and making everything fit together and solving the puzzle. Basically, I looked at it, I really enjoyed it. So I ended up majoring in accounting, went into public accounting, internal auditing, did the whole normal accountant internal audit career path, and then decided that I wanted to launch on my own so when I launched my own business, I knew I wanted to do accounting and maybe some fraud. And so I wanted to narrow it down on one industry and become really good at that industry. And so that's where I came back to construction is just getting back to the trades and wanting to serve the trades. So that's how I married the to the best of both worlds.
Yeah, that's awesome. Very cool. Well, and you must have maybe picked up a marketing minor because not everyone thinks, Oh, I'm going to specialize in an industry, they say, I'm going to focus on everybody, and then they don't focus on anybody. Yeah, that's awesome. Well, let's dive in a little bit, I guess, you know, being so close to the numbers and everything. What are some of the biggest mistakes that you see, you know, the trays making or construction folks making when it comes to to their numbers.
So construction accounting is not easy by any means. It's probably one of the more complex areas of accounting, it's not just your debits and credits, you add Job Costing on top of that. So most of the guys go into business because they're really good at the trade and they want to do it for themselves and create their own business. And so they forget about the complexities that go along with it. So they really missed the mark on the job costing piece. And even within that, it's the labor piece that goes into it. You have all these guys out in the field that are doing your labor for you in house, but then they're not getting it back into their job costing per project. So that's where I see a lot of them missed the mark in their accounting.
Gotcha. So yeah, just all coming back to that job cost area and attributing whether it's in house labor or outsource labor and getting it back to the job and maybe a silly question, but you know, why is that so critical, not only from a profitability standpoint, but also from just an accounting standpoint.
And we'll probably talk on on this later on your budgets, but just really seen per project, how well you're doing and does it make sense to have people in house doing the work or should you outsource it? Making all those decisions, and then tracking your materials because most of the time your clients are coming to you and say, Hey, I have an open budget, just spend whatever. Yeah. So if you're not sticking within the their budget, they're not coming back to you. And then it's just a ripple effect, and you're not getting recommendations. So you have to be very spot on with your budgets. Otherwise, you're not keeping within your clients budgets. And it's just a ripple effect.
Yeah, yeah. So let's talk about budgets. I guess. You know, when a lot of people think budgets, they think overall company budget, but obviously we've got budgets per job, and then that those all roll into overall company budget. So let's start with budgets on on a job level, like, why is it important to have that budget and then how do you actually go about creating a budget that that works?
Absolutely. So at the job level, if your client comes to you and says I have $100,000 for this project, you have to make sure you You're within that budget, and not having overruns and not having that conversation of Oh, sorry, I went over give you more money, that's not going to go well. So it's critical to have it at the individual level of the job, but then also for your overall company. That way you can determine what's working what's not, and making critical decisions instantly and not getting at the end of the year and saying, Oh, crap, Where's my money? Where did I spend what's working? what's not working? And as you know, from a marketing perspective, if you have a budget in your marketing, is it working for you? Or do you need to spend money in other areas, going to conferences, getting new people getting new software, so really making those decisions, but if you're not budgeting for it, and really tracking against that budget, you're just flying by the seat of your pants and you don't know what's working and what's coming and what's going on? So you're really doomed.
Yeah, yeah. And so how do you let's break it down a little. How do you go about actually like creating that budget, you know, and so, Okay, I gotta have a budget because then I can make sure I'm profitable or I'm deciding what is working, what's not. But how do you actually, you know, sit down, say that example is I've got client, we've got $100,000. Like, how are we going to make this all work? You know, from a budget standpoint.
So I'll take it up one level, and from the overall business perspective, really, what you want to do is start from prior year finish out your year. So right now we're finishing out 2019. We're going to start budgeting for 2020. And so where do we end the year? What worked? Where did we spend our money and then looking at each line item, what did we spend, we need to increase it or decrease it and move allocation dollars elsewhere. But then I take it, there's a couple of ways you could take it, you could take it from the bottom up or top down approach. So the top down approach is taking your current revenue. So let's say you had a $5 million year in 2019 do we think we're going to Stick with $5 million in 2020 are we going to increase that because we've, we've gained some momentum. So now we're gonna have a $6 million budget. And so then you work in Down, down, and then take a look at your salary or overheads, your payroll and just work at every single line item down and make adjustments. But really, it's starting from where you're at and making projections for the next year.
Yeah, yeah, like, That's good advice, because then you got, you know, a starting place of reality, right? It's like, sometimes you have these pie in the sky budget. So you think, Oh, yeah, we can hit this, but you start with what really happened this year and go, okay, going into next year, here's, you know, here's what we need to change or adjust so that we can make it work. I've got kind of a follow up question there. And I'm super interested in it personally, because I'm a big budgeter not only on the business side, but just personally you know, keeping and tracking along with a personal budget. How do you in on the business side? How do you decide whether to create your budget based on existing revenue? Or growth revenue? You know, so like your example, you said, let's say you're at 5 million for 2019. And then you're you're forecasting, you might be at six. There's a good chance you won't get to six, maybe I'll get to 5.5. So do you recommend that you have a budget that's like, Hey, we're staying where we are at 5 million. And then you also have a growth budget where maybe like after q1, you see where your revenues at and you can pick up some expenses? Or I guess I'm just curious, how do you approach that because there's no guarantee that you'll grow obviously, that's the goal,
right? And some guys to they want to stay, they want to maintain and they want to refine their processes. So it really depends on the business and where you want to go and some want to scale back to not everybody wants to grow. They want to scale back their employees. So it's really up to the business owner what they want to do, what are their goals for The next year, I wouldn't say that the budget is a moving target. It's really once you set it for 2020, you stick with it. And then as things if it goes up or down, let's say you're not hitting your targets where you think you might be, then you go back in and you say, okay, we're going to spend less than our marketing budget, don't change your budget, your budget is set. But you'll move dollars into different buckets is what I would say. And then if you're doing well, you're projecting I wouldn't increase your spin. What if something happens those rainy day moments? If you get to the end of the year, you had a great year. Now you have a huge tax bill or you want to buy equipment, so I wouldn't increase your spin on keep to your budget, keep on track, you're having great year and then you just smashed your budget that you set for 2020. So then you can celebrate at the end of the of the year. Gotcha.
Yeah. Yeah, like that. It's kind of like, you know, on the personal side, if you you know, you get a raise You know, partway through the year, keep your budget the same, you know, and then that all just becomes, you know, bonus that you, you know, you're taking in through the top and, and dropping out of the bottom line, so to speak. So, I like that. But let's maybe switch gears a little bit and talk about fraud. Because this is something that I know, you're, it's kind of one of your hot topics right now. And it's a super important topic. So I guess, what does fraud look like? And how, how can it happen, you know, in, you know, just our normal day to day lives when we maybe don't expect it?
Absolutely. So I'll give you a little background on how I got into fraud. I didn't ever think I would just be a fraud person. When I was early in my career, I had a boss who had his CFP, which is a certified fraud examiner. And he was like, this is an awesome certification. Even if you don't do anything with it, you should take the test and you'll learn a lot and just study it in makes you a better auditor and a business owner someday. So I got my certification, I think it was 2011 2012. And then I went into public accounting, and I was the only one in my group that had the CFP. And one of our clients at that time was a bank, a huge bank in South Texas. And one of the branch managers was stealing off of lines of credit. And so the client called in the FBI and the OCC so the OCC regulates banks, and they're like Nicole, you need to go down and work with the FBI and the OCC and get this figured out. So I went down, I had no idea what I was doing. It took another person with me and said, Let's go figure this out. We can trace it out. We have our auditing skills. We know how we can put this together so we ended up putting the case together. But what this branch manager was doing in and it was a line of credit for a construction company so it all kind of came full circle too. But they had had an open line of credit. They didn't have set terms on when they needed to pay. They just kind of paid as they went. But this lady was skimming off of the line of credit, but she was not sending the bank statements to the business owner. And she happened to be out on vacation, she had to take her mandatory two weeks off that's required at the bank. And the client came in, and notice that their statement didn't match what the bank was saying. So that's how this all unraveled. And so having that fraud background and that experience now I bring that over to my construction clients because fraud happens a lot in construction clients because there's usually only one person in the accounting group that handles everything from payroll accounts payable, accounts receivable, there's just not enough people that they can justify having multiple peoples to set your date the duties. So that's why we see it so often in construction is because there's Only one person. So we bring that mindset in for our clients and give them tips on how to segregate or if they bring in our team will have multiple people handling the accounting, we don't have one person so that we can segregate the duties and get enough eyes on the transactions and help them be aware of the fraud. Really?
Sure, sure. Yeah. And so, you know, maybe for some of those companies that are a little bit smaller, where they don't have you know, all the checks and balances, what are a couple of easy tips that those people can implement, so that they at least have a couple of checkpoints where you can catch some of these things.
Absolutely. So I tell my owners first and foremost, they have to be involved. I've had some owners in the past that say, I'm not a numbers person. I just don't even want to be involved, but you have to be involved. You're still leading the ship and you need to know what's going on. So they have to be involved in even get in and pull their own reports. That's where we see They'll just ask their account manager, their accounting person, their bookkeeper, Hey, can you pull me this report? Well, those reports can be manipulated, and they can cover it up. So go in pull your own reports, but also send the bank statements to your house, not to the office and not having somebody else. Even if somebody else is doing the reconciliation, send it to the house. That way you can take a look at it, see what's going on? Where checks being cut, who are they going to and just look at it to see if anything feels out of the norm. You might not be able to hire multiple people, but be involved. Yeah,
yeah, that's good. And do you recommend you know, looking at, like your bank account, and like your statements or you know, QuickBooks on certain intervals, and are there places that you can look to kind of catch maybe some of these common places where people might be skimming or you know, finding a way to kind of hide things.
So A few areas really is off there, they can be sending checks to vendors that it's not really owed. So if you're involved in those projects, and you know what subs you're using, you might be able to catch it that way that, hey, we didn't hire this painter this month, we're not in that phase of the project. Does that make sense? So you might catch that off a text but also review payroll is another area where they're reimbursing themselves for personal expenses. So, take a look, do a gut check, like what uh, what should our numbers be for payroll, at least have a starting point of Okay, our overhead and payroll is $20,000 a month or whatever that might be. And does it fluctuate? Is it slowly going up? Like what are those trends that are making it go up or down and just kind of do a gut check and that and then I also tell my clients to take a look at vendor spend. Do a report that shows like We talked about we're paying a painter, but we're not in that phase of the project or we're paying drywall. But we're not. We don't have drywall going on right now. Does that make sense? Who you're paying out each month and you should know, as a business owner or even your project managers of where you're at in the phase of the cycle for each of your projects?
Yeah, yeah. Those are great tips and great suggestions. And, yeah, I feel like, you know, for anybody listening, if you can put in a few of those checkpoints into your regular process, you know, I'm doing these things on Monday or these things on Friday, you know, then you've got that, you know, at least habit built in and routine of being able to identify some of these things.
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Absolutely. So I had a client that I don't think there was fraud going on, but there's potential. And they brought in a second person. So they had one person that was in the office that was doing operations and some data entry. And that person was becoming overwhelmed. So then they brought in a second person. Well, the second person they brought in to help was the wife of the husband that was doing all this review. So they thought they were segregating their duties, but really, now you have related parties. So then what was happening was the husband's in charge of reviewing payroll, and making sure everybody's clocking in clocking out that their hours are right, but now he's also responsible for monitoring and approving his wife's hours. So there could be some collusion. And then he's also responsible for mileage reimbursements. They go on payroll every week, so he's entering that. Well. The wife was also running errands and doing some office tasks. So she had mileage reimbursement. So he's, he was reviewing hers and submitting it not that fraud was happening, but it could there's just potential. So we really tell our clients and we help them with this as map it out and see what your processes are. And I think if you have a good picture of who does what, and how does information come in, who's handling that? Who's approving it? Who's reviewing it? And and how does that information go out? I think if you see just one person across the board doing everything, you know that there's some issues there. So you need to have a second set of eyes. If it's you, even though you don't want to be involved. You have to be involved and reviewing and approving. And making sure that everything is going the way it should.
Yeah, yeah, I think that makes a lot of sense. You know, as you're talking, I'm thinking there's got to be some way to kind of see like, Where do I stand currently as a business how much you know, am I at risk right now? Is there like a checklist or some sort of assessment that you would recommend people take where they go? Okay. This is what I'm doing now, how much of a threat level do I have? You know, or how exposed to my to potential, you know, instances of fraud?
Yeah, absolutely. So we do something like that called a risk assessment is something that we come in and we performed for our clients. And so think of it almost like an OSHA safety assessment. Sure. They're coming in and they're trying to see where you might have safety hazards and what those risks are and how you can implement better processes. Same thing with the fraud risk assessment we come in, we take a look at your processes from start to finish and tell you where your risks are, where they lie, and then what's that risk? Is money going out? Is that a small risk? Is that a high risk and do we need to implement processes for that? So that is a fraud risk assessment, but really, I think From a top down level, if you're just getting started, know what some of the internal controls are. And I've put a ebook out there. So I have that on my website. And it gives some tips that some checkpoints of what you can look for if you're just getting started and just having the conversation of Do I need to have this done? Or am I okay for now, but really, we don't want to talk about fraud. Nobody wants fraud, and they don't think it's happening. It's happening to their competitors. But I think really being on top of it and acknowledging it happens. We read about it all the time. I get Google alerts on embezzlements and construction fraud. It happens it's going to happen. It's just a matter of timing. So really getting ahead of it and being ready for it.
Yeah, yeah. And you're right. I mean, it's not a fun topic. But I mean, my wife works. The d dS office and she worked in economic crimes division for a while and she was always telling me these stories of means so many of our cases were fraud. And a large percentage of those happened to be in the construction field. And I think probably part of that is just kind of what you said earlier, it's just the complexity of what's going on. But also, a lot of times, the way we get into this field isn't because we went to business school or took accounting, it's because, you know, you like the trades and fell in love with, you know, the work. And so, you know, I think you make some good points. And we'll definitely link to the E book, because I want everyone to be able to at least do kind of a brief self assessment, even if you're not going to go through the formal process of doing a full audit, but I mean, we never think it's going to happen to us, and then you know, it's possible And so again, it's not necessarily a fun topic to talk about, but oftentimes, those are the most important to talk about because it's real dollars that you're working hard for and, you know, you want to want to keep the dollars that are supposed to be yours and not having them stolen from you. So But Nicole, I guess how can people learn a little bit more about you or connect with you online and that sort of thing.
So I put a lot, I'm pretty active on LinkedIn, I put a lot of content out there, I have a lot of articles of things to look at. I've started a series of construction fraud, and some areas to look at, within your own employees, your subcontractors, your payroll, people. So there's a lot of great content that I put out there. Follow me on LinkedIn, let's get connected. And they can also reach me on my website and find more, and putting it out on my blog, and then also the ebook as well on my website.
Cool. Yeah. And we'll, we'll link to those in the show notes as well. And yeah, that's actually how you and I connect with on LinkedIn and and notice that you just kept putting out all this helpful information like oh, yeah, I should, you know, look into that for us as well. And yeah, so I encourage you guys that are listening, connect with Nicole on LinkedIn. But, Nicole, we got one last section of our show here. We call it the fastest Five, I'm going to kind of hit you with five rapid fire questions. So you're ready.
I'm ready. Let's go.
Cool. Let's do it. So favorite business book and why?
Oh, Cynthia Cooper learning about WorldCom. That's, that was my DK now in the fraud. I love her insights and seeing what she she had a whistleblower, and she was the whistleblower. And so learning about how she came up through the ranks.
Cool. Yeah, I haven't heard of that one. I might have to check that one out. All right, who is the most inspirational person in your life?
Oh, this is gonna be cheesy, but my husband, he is a leader. He's a coach. He has lots of people that work under him. So I take a lot of what he does in his own personal business. And I always tell people, I would be fortunate to work for him, but I would never tell him that. I hope he's not listening, but
we won't send him the link.
So he's very influential in my life.
Cool. That's awesome. All right. If you could have one superpower, what would that be?
Oh, time travel.
Time travel. That's a good one. I like that one. All right. Describe yourself in three words.
Oh, caring, compassionate,
and thoughtful. Awesome. All right. Final question is if you could leave our listeners with one piece of advice. What would that be?
It's a matter of time before fraud will happen. So be prepared and correct the issue when it does happen. Don't just scrape it under the rug and move on.
Cool. Yeah, that's great advice. And, Nicole, thanks for joining me today. This stuff is really, really important. So I'm glad we had some time to chat about it.
Thanks, Spencer. Thanks for having me.
Unknown Speaker 26:51
All right. Talk to you soon. Thanks.
Hey, thanks for tuning in. Guys. Again, that was Episode 73 with Nicole Landau and Let's talk action items. So there were a couple of things that I pulled out from today's episode. And the first one was in regards to budgeting. And I really liked your approach to take your existing budget or the reality of what happened this past year and use that as your starting point for the budget. That way you're working off of real numbers. And you've got that as a starting point. And then you can make some adjustments. So if you did 2 million in revenue, or 5 million or whatever it was, look at all those expenses, look at your profitability, and just use that as your starting point and say, did I achieve the profitability I wanted, maybe I need to cut in some areas. You know, where was I in some of these other sections, go through every line item, see where you can cut but that's a really really great way to start with your budget for the next year. The second thing is definitely take advantage of the the ebook she's got put together. And I want you to check that out because you can do a self assessment on how exposed you are Some potential fraud, you don't have to spend any money. It's a way you can do this on your own and, and basically go through that assessment. And so this is something that again, I've seen and heard about it just in my direct experience. Again, with my wife's position, she's seen a ton of this, Nicole seen it happen to people. And it's just very, very common in our industry. So I encourage you to at least go through some sort of self assessment, look at your process, and see where you might have some weak links, and then you can start working on correcting those and improving those. So again, I hope you guys got a lot of value out of this episode. Not necessarily a super fun and enjoyable topic, but a very, very important one. Thanks again, guys. I appreciate you listening and we will see you next week.
Thanks again for listening, everybody. And as a quick run Text Radio 233777 for some free goodies as a thank you for listening to the show. And if you got some value from today's episode, I just ask that you leave us a quick review on iTunes. It really helps us spread the word and grow this awesome community of people who are working to improve their lives and their businesses. Thanks again and we'll see you next time on builder funnel radio.