How you can get the business side of your business in shape for future growth
Most construction companies don’t fail for a lack of skilled craftsmanship. You get into this business because you’re good at moving dirt, running machines and building things.
But craftsmanship will only take you so far. Contractors who fail at construction almost always do so because they didn’t master the back office business essentials. And unless you have a business degree or learned these lessons from a mentor or working for other contractors, there’s a lot to learn.
It’s an old saying, but true, you can be broke in this business and not know it for six months. That’s why with the generous support of Case Construction Equipment and the participation of the Association of Equipment Management Professionals, we’re starting this new series in the magazine: to help you understand and master the less glamorous, but essential, business basics of construction.
“We’re dedicated to helping construction business owners maximize their growth,” says Jim Hasler, vice president for Case Construction Equipment. “Sponsoring Construction University is a meaningful step in supporting our industry and customers.”
So grab a cup of coffee, pull up a chair and learn how to make sure your company not only survives, but thrives in the years ahead.
Construction University is produced by Better Roads and presented by Case Construction Equipment
ARE YOU BEING EMBEZZLED?
There’s a better than average chance a small business will be the victim of embezzlement. What you can do to spot – and correct – the situation.
Times were good in the early 2000s when a Southern California contractor went looking for a financial manager. “This candidate was far above anyone else we interviewed,” the contractor says. She had construction experience and caught on quickly. He immediately gave her more responsibility.
The manager would sit down with him every month, going over the books. Everything looked good until the recession hit. The contractor faced hard choices. He laid people off and cut pay. He took out a second mortgage and put personal money into the business, but it wasn’t enough. The financial manager told him the company couldn’t make payroll.
Times were hard, but that didn’t add up. One night, when looking at his online banking statement, the contractor noticed a check to a company he didn’t recognize. Staying up until 2 a.m., he found evidence his financial manager had written company checks to herself totaling $45,000.
When it was all tallied, the manager had taken $1.7 million from him in eight years, forging his signature on more than 280 checks.
The experts we talked to agree: contractors are no more susceptible to embezzlement than other types of businesses. But that’s cold comfort.
“Discovered embezzlements suggest that on any given day one in four businesses are being embezzled,” says Arnold S. Grunddvig, Jr., who devoted the first chapter of his book, “The 90-Minute MBA,” on the subject. “A very small number of them make the news.”
Unfortunately, there’s a group of people who will always steal if given the right opportunity.
“These businesses have small staffs doing multiple jobs,” says Allan Bachman, education manager, Association of Certified Fraud Examiners (ACFE). “And many small business owners don’t have a full understanding of their accounting processes. They trust others to do it, and that trust can be misplaced.”
Having one person control the total flow of your financial well-being is a risk you need to reconsider, say our experts. “It becomes a perfect storm,” Bachman says. “We recently interviewed one embezzler who said he knew he could steal from the company when the owner handed him the mail with the bank statements unopened,” Bachman says.
Sniff out the problem
There is no embezzler profile. “They can be almost anyone,” Bachman says. “They don’t look or act like criminals.” Still, some key traits have emerged in the association’s research, which examines global employee fraud every two years:
• Around 87 percent of occupational fraudsters (as the association calls them) are first-time offenders with clean employment histories.
• In 81 percent of the cases, the fraudster displayed one or more behavioral red flag.
One such behavioral red flag is a sudden flash of wealth. Glenn Carniello, partner with CPA firm SingerLewak, relates an example: A client’s comptroller got a new car and was wearing expensive jewelry, even though her husband had been unemployed for 18 months. “She became very defensive when I asked for bank statements and she refused to give them to me,” he relates.
Which illustrates another red flag: “An embezzler can be extremely defensive about who’s in their office,” says James Leichter, owner of RA Tax and Accounting, and a construction fraud consultant to insurance companies. “They don’t want people using their computer, and they don’t want to take vacations.”
Other warning signs abound, if you are alert to them. Go to theconstructionuniversity.com to download “10 signs you may be being embezzled.”
So how do they do it?
While there are many variations on the theme, here are some common schemes among those who embezzle from contractors:
You’ve done business with XYZ Concrete for years, so you don’t notice when you start signing checks to XYZ Concrete Supply – or that the check is going straight into an embezzler’s account.
After you sign it, the embezzler alters the amount or the name on the check. So instead of paying $1,000, you’re paying $11,000, and the embezzler has pocketed the difference.
Client A may pay on time, but some or most of their payment is diverted. When Client B sends in a check a little later, their payment goes into Client A’s account, and so on down the line.
Embezzlers place an order for three computers, and the company receives one, while the other two are sold on eBay.
Bob Smith may have left your company last year, but payroll is still cutting him a check, and the embezzler – and perhaps an accomplice superintendent – gets extra pay.
“Many times a person will purchase items for a business and then return them for credit or cash,” Leichter says. “They have the original receipt and they can just dispose of the return receipt. If you’re out in the field and not really concerned about your office, how would you know?”
What to do?
“Most embezzlers are only found by accident, since few companies have the controls in place to catch them,” Grundvig says.
The first line of defense: stop having one person handle the total ebb and flow of your finances. Break up your financial tasks. “The person who signs the checks should never be doing the bank reconciliation,” Leichter says. “The person who pays the bills should never be signing checks. Spread it around. It’s a lot harder to open a door with five locks.”
Another simple tactic is to have your company bank statements sent to your house. You can then review them outside of the office in a less-hurried atmosphere.
Grundvig, who also is owner of software firm A-Systems, recommends using software with an audit trail that cannot be turned off. “I know a bookkeeper who raised her pay every payday, and would then go back in and reverse it,” he says. “She didn’t know all of her changes were recorded. She’s now in jail.”
And compare costs. “You’ve really got to look at your costs quarter over quarter and year over year,” advises Carniello. “Do the analytics to make sure your numbers are consistent or, if unusual variances exist, they are explainable.”
“Reviewing invoices before they are paid is a great practice,” advises Jack W. Harris, a Greenwood Village, Colorado CPA specializing in construction. “It’s an onerous task, but it must be done to properly manage your business.”
For more tips, review the ‘Take these steps now” sidebar on page 41.
“Contractors have to get interested in their company’s bookkeeping,” insists Leichter. “You’d be surprised how many owners don’t know the administrator password on their own accounting software. Show as much interest in accounting as the field.”
For many reasons, there’s a lot of under-the-rug action when embezzlers are caught: the thief is a family friend, victims are embarrassed they were duped, or victims don’t want to go through hassle of the legal process.
Don’t be tempted to just let them walk away, Bachman advises. “Make sure everyone knows that you’ll make a giant stink,” he says. “You’ll go to the police, you’ll sue them civilly, and you’re going to do everything you can do to get your money back.”
“Unfortunately,” Bachman concludes, “there’s a group of people who will always steal if given the right opportunity.”
Take these staps now to counter embezzlement
1. Have your bank statements sent to your home, and take time to review them. Regularly check your online statement to see if the debits/credits make sense.
2. Understand the value of having and enforcing a purchase order system. It’s your fundamental paper trail.
3. Watch what you’re signing. You may have done business with ABC Concrete for years, so a check for ABC Concrete Supply might slip your notice – and funnel your money into an embezzler’s account.
4. Have someone outside the company reconcile your bank statement. Thieves are discouraged if they know someone else is going to be looking at their work.
5. Control your accounting software. Only you or another owner should have the administrative rights to your accounting system. All others should be set up as users. And don’t share the administrative password.
6. Openly talk about ethical expectations with your people. Make sure your employees know your door is open to talk about troubling things they may have seen. And be clear: You will prosecute.
7. Make everyone take a vacation. Embezzlers don’t like vacations – it means that someone else will be doing their job … and looking over their handiwork.
For more counter measures, go to theconstructionuniversity.com.
Want more info?
There’s a lot more to this topic than we can cover in these pages. To view the top 10 signs you may be being embezzled, view one contractor’s account of his own embezzlement and get a detailed list of actions you take now to counter embezzlement, go to theconstructionuniversity.com.