COVID-Related Fraud Risk on the Rise
Feb 19, 2021
Many small business owners do not believe their businesses can or will fall victim to occupational fraud. Due to this belief and budget restrictions, many small businesses do not make this a priority, which leaves them vulnerable.
According to the Association of Certified Fraud Examiners’ 2020 Report, financial statement fraud is the costliest type of occupational fraud affecting organizations. Financial statement fraud is not only costly from a fiscal standpoint, but it also impacts trust within the organization, the community, and with investors.
The rapid advance of COVID-19 has placed a significant strain on organizations and individuals alike. Donald R. Cressey’s fraud triangle theory includes the three major factors that are commonly present when financial statement fraud occurs: Pressure, Opportunity, and Rationalization.
Here is how COVID-19 has impacted these factors:
Pressure – Organizations are facing challenges never experienced before. COVID-19 has left many facing revenue loss, supply chain disruptions, and employee wellness concerns. All these factors, and more, are causing undue pressure to meet financial expectations.
Opportunity – While organizations are receiving state and federal funding to cope with the financial impact of COVID-19 disruption, there are dramatic shifts in operations with remote working and a reduction of in-office staff. This means internal controls are reduced and accessibility increased. These become prime opportunities for fraud.
Rationalization – Mounting stress impacts individual decision-making skills, leading people to rationalize actions they would otherwise regard unacceptable or illegal. Employees may rationalize they are “owed” financial support because of the work they do.
Some potential areas to consider when thinking about your organization include:
- Revenue recognition – The timing and amount of revenues recognized.
- Allowances and reserves – Changes in methodology and unusual adjustments.
- Valuations – Significant estimates used in projections, declining cash flows, and idle assets.
- Treatment of expenses – Expenses are recorded in the proper period.
- Disclosures – The adequacy and sufficiency of disclosures.
- Margins – Reasonableness of margins given the current year operations.
- Internal control – Opportunity for control override.
These are just a few of the common ways for financial statement fraud to occur. While we all work diligently to recover from the COVID-19 disruption, we need to be aware of the heightened risks and adjust our processes and tasks to monitor for this risk.
If your company needs assistance, William Vaughan is here to assist you.
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Juli Seiwert, CPA
419.891.1040 | firstname.lastname@example.org
Categories: Audit & Accounting, COVID-19
Boosting Your Construction Backlog During Disruption
Dec 17, 2020
The ongoing pandemic environment has wreaked economic havoc, impacting every sector, some more dramatically than others. From project delays and cancellations to increased competition as a result of stimulus funding (PPP), the construction industry has experienced its fair share of COVID-related issues. Still, for many contractors, the impact will not be fully felt until well into 2021, when backlogs begin to dwindle. According to the Associated Builders and Contractors’ (ABC) Construction Backlog Indicator fell to 7.5 months in September, a decline of 0.5 months from August’s reading. This backlog report is 1.5 months lower than in September 2019.
Those who proactively adjust their business practices will be the ones who survive this unforeseen disruption. Here are some strategic opportunities to improve your backlog to remain competitive and emerge stronger post-pandemic.
Since the start of the pandemic, there has been a significant decline in retail and restaurant-related projects and an increase in healthcare contracts. Contractors who have padded their backlogs with retail and restaurant work may be facing considerable losses during the slowdown. The more a construction firm diversifies its project types, the better equipped it will be to weather a disruption. Diversifying can mean taking on multiple construction project types, like public or private jobs or branching out into service work, or picking up a new trade or skill to add your construction repertoire. If you find your company has gotten into a rut when it comes to the type of projects you are doing, now is the time to consider expanding your focus. Whether it is public/private, residential/commercial, or a different industry or building type, diversification is the key to protecting the health of your backlog.
It may seem counterintuitive, but during uncertain times being strategic and selective about the work you take on may be the leg up you need. Increasing profitability should be top of mind rather than padding your backlog for volume. Taking on new work for the sake of volume could be detrimental as it only takes one bad project to damage your organization and its reputation. More importantly, strategic business planning should look at 30/60/90 days rather than the typical 2-5 year plan. Scenario planning will also help you be flexible should another disrupting event occur.
Hand-in-hand with strategic a mindset is looking for ways to reduce waste and become more efficient. Reviewing your current processes and looking for methods to slim down your operations will save capital in the long-run. Technology can be a great means to enhance efficiency and provide a clear picture of your costs. Business intelligence solutions like Microsoft PowerBi are providing contractors with an in-depth look at key metrics with the ability to customize reports and spot anomalies as they arise. Harnessing the power of data allows for better business decision making.
Labor shortages have consistently plagued the industry and now more than ever, retaining your current talent is crucial. While the construction sector was deemed essential at the onset of the pandemic, the health and safety of workers was a concern. According to the Associated General Contractors of America’s 2020 Workforce Survey Analysis found the pandemic “contributed to conditions that make it difficult for a majority of firms to find craft workers.” Continuing to invest in the wellbeing of your current workforce and demonstrating their value will help attract and ultimately retain employees. Finally, assessing your leadership to ensure you have the right people in key positions will aid in your ability to source new projects.
Leveraging your top clients can be a differentiator. After all, they know the quality of work you do and can speak to their satisfaction. Investing the time to revisit your clients and understand their current needs may prove to be more fruitful in securing new work.
As 2020 comes to a close and we look into the future, now is the time to proactively adjust your business strategies to emerge stronger post-pandemic. Those who take steps now will gain a competitive edge in today’s rapidly evolving climate. Our William Vaughan Company Construction team can provide guidance and offer value-added recommendations on this very topic.
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Ryan Leininger, CPA
Construction Practice Leader
Categories: Construction & Real Estate