Construction Fraud Opportunities: Lines of Credit

"I trust my bank and depend on their processes to ensure my records are accurate."

Have you ever wondered why continuous reconciliation is important? Continuous reconciliation? The process of ensuring account balances are correct between two accounts on a continuous basis.

"Jane," as we will refer to her as, was the Branch Supervisor at a bank in south Texas. Jane was also tasked with small business client relationships as part of her role with the bank. One day, Jane had called in sick. While she was out, one of her construction clients came in as they had noticed their bank statement on their line of credit (LOC) didn't match their accounting records. They weren't receiving their bank statements on a regular basis so they were inquiring about the bank records.

Upon further review for the client, another teller had discovered that Jane was hiding more! The construction company had a LOC that could be used at their discretion and paid back at any time, incurring interest with no set due dates. Jane had access to update the client address so she was receiving bank statements at the bank that she later told she was "holding for the client to pick up." Additionally, at that time, checks were a part of the LOC to where the client could write a check off of the LOC directly to vendors. Jane had ordered checks on behalf of the client and had them delivered to the bank for pick up. The client never ordered the checks! Jane was writing checks to her personal account along with checks to her parents. As deposits were coming in on another LOC, Jane was applying the deposits to this LOC and the client never received the bank statements to see what was going on. She was moving money to cover the previous day draws.

Looking back, her coworkers had noticed some odd behavior, but didn't ask additional questions. Jane never took a vacation, she was very possessive of her clients, going through a divorce and encountered financial difficulties. If they would have been trained in fraud prevention, they may have asked additional questions or had the courage to speak to management.

What were some red flags in this case?

• No bank statements delivered to the customer
• No vacation by Jane
• Personal financial difficulties
• Lack of internal controls by the bank

What are some internal controls you can implement to protect your business?

• Continuous reconciliation process - regularly updating accounting records to match the bank
• Follow up on missing bank statements - if they come to your office, ask where they are or call the bank directly to receive one
• Implement proper segregation of duties within your own company to protect your LOC

Fraud prevention is not a movement that will take place over night. Don't expect team members to be able to handle their fraud risks without the proper training and skills to identify such. Provide training specifically addressing how to prevent fraud, detect and handle fraud. Don't rely on third parties for fraud prevention, implement your own processes. Fraud training is what we do. Let us know if we can help you!

Landau Consulting Solutions, LLC specializes in outsourced accounting solutions for construction companies. We also provide fraud prevention training and risk assessments. Contact us at [email protected].