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October 28, 2014

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Fraud Risks in Major Projects: The Role of the Executive

Alan Day, FSyl and Fellow of the Security Institute, considers the issue. 

Some years ago I met with some very senior executives responsible on a new and exciting major railway construction project.

“Have you considered the fraud risk?” I asked. “Not really,” came the reply.

Unfortunately this is a fairly typical response. Project leaders have so much to think about at a project’s early stages and fraud risks are often underestimated, sometimes even totally ignored.

However, implementing a relatively simple, straightforward fraud prevention strategy in a project’s early stages can minimise the harm caused by attempted fraud.
Dubai metro railway
Project leaders and managers therefore must consider fraud risks take appropriate action to manage them.

But what are these risks?  They include (and this list is not exhaustive):

  • Contract fraud – such as bid-rigging
  • Contractor fraud – such as using inferior material at a higher cost
  • People risks – such as falsified CVs, expenses fraud
  • Conflicts of interest – such as collusion between suppliers and staff
  • Accounting/financial fraud – such as mandate fraud and duplicate invoicing

Fraud can be perpetrated by anyone connected with your project: project staff themselves, suppliers or subcontractors who can identify an opportunity to make easy money on the back of your project. Your project may even be the target of organised criminal gangs.

Acknowledging the threat

The starting point for effective deterrence is for the project executive to fully understand and acknowledge fraud threats faced and the harm caused. This helps to build confidence among staff and stakeholders that fraud risks are taken seriously and action will be taken to address them.

Acknowledgement of such responsibility by the leadership will empower management (and any in-house counter-fraud professionals) to identify and manage fraud risks correctly. It will also act as a deterrent to would-be fraudsters, making them think twice before jeopardising your project.

Approved at the highest level and focused on outcomes a clearly defined strategy is essential if the risk of fraud is to be taken seriously. A strategic plan is essential in establishing an anti-fraud culture and providing the opportunity for the leadership to be explicit about their approach.

A strategy will also identify appropriate preventative and reactive action with respect to fraud and where this responsibility lies within the project.

Notably, unless an effective risk management methodology is used, your project’s leadership will not be able to identify areas of vulnerability and valuable resources and time may be wasted on the wrong areas.

In the example I gave at the beginning, I explained to the project executive that fraud is an ever-present risk to all organisations and that these risks also apply to major projects, in particular construction projects.

I went on to show that fraud can significantly add to project costs and undermine the project objectives. Indeed, many assessments indicate that a project can lose as approximately 5% of its funding to fraud.

Those executives accepted by arguments and incorporated fraud as a strategic risk into their project and developed a counter-fraud strategy. We even set up a specific risk subgroup to regularly review the fraud risk register.

The executive’s support has had a fundamental impact on fraud prevention during the project’s lifecycle.

There is a common misconception that fraud couldn’t happen here.  In major projects it will and it does. It is never too early – or, indeed, never too late – to address these risks.

Alan Day FSyI is a Fellow of the Security Institute and a Director of AKD Services Ltd.  www.akdservices.co.uk[email protected].

 

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