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AGC/CFMA Conference Recap: Fraud, Internal Controls and Ethics

Posted 12:00 PM by

Recently, the Association of General Contractors/Construction Financial Management Association’s (AGC/CFMA) 19th annual conference took place in Las Vegas, Nev. The conference began with several group sessions that focused on three of the central themes of the week: fraud, internal controls and ethics. 

Several financial executives, from small to large construction and accounting firms, discussed real-world examples of fraud they have encountered in their careers and internal control weaknesses that contributed to the fraud.

Types of fraud:

  • Corruption (conflicts of interest, bribery, illegal gratuities) 
  • Billing schemes (shell companies, personal expenses)
  • Expense reimbursement schemes (overstated reports, fictitious reports, entering multiple reimbursements)
  • Check tampering (forgery or altering checks)
  • Non-cash theft of company assets (tools walking off jobsites)
  • Payroll schemes (ghost employee, falsified commissions)
  • Cash larceny (forged maker or endorsements, altered payees)
  • Financial statement fraud (misrepresenting financial condition of company)

Most common ways fraud is discovered:

  • Tips from either employees or vendors
  • Management review
  • Internal audit
  • By accident
  • Account reconciliation

Control weaknesses:

  • Lack of internal controls
  • Lack of management review
  • Override of existing internal controls
  • Poor tone at top of management
  • Lack of competent personnel in oversight roles

In addition, internal controls that would have prevented the fraud or that had been established as a result of fraud were discussed in interactive Q&A periods at the end of each session. The top internal controls that prevent fraud include:

  • External audit of financial statements
  • Code of conduct created and enforced
  • Internal audit department
  • Management certification of financial statements
  • Independent audit committee
  • Establish an employee hotline

For the GAAP-focused financial professionals, there were sessions on revenue recognition rules, internal and external auditing techniques, and risk mitigation. For the tax professionals, several tax-focused sessions were offered that presented the most recent tax issues and “hot topics” for the Internal Revenue Service (IRS). 

The new section 263a capitalization rules were a major theme as they will affect tax returns being filed in the 2015 tax season for the first time. Advantages and disadvantages of setting a higher capitalization limit were discussed, as well as different situations that could require a change of accounting method election to be filed with the IRS. 

Advantages of new capitalization rules:

  • Tax follows book on expensing of items (no book-to-tax difference)
  • De minimus rule protects taxpayer on all items under the limit in an IRS audit
  • Simplification of financial statement reporting

Disadvantages of new capitalization rules:

  • A 3115 will potentially be required to be filed.
  • Accounting method change will have to be evaluated annually.
  • Even with safe harbor limits, the IRS may scrutinize invoices to make sure one item was not split into multiple invoices to attempt to fall under the safe harbor limit.
  • Some states will not be following the safe harbor limit.

During a session on recent IRS trends, the main topic was method of accounting for tax purposes. The IRS has recently been scrutinizing correct methods of accounting for companies under audit. Specific to the construction industry, the IRS is looking at percent complete accounting and looking in depth at the proper reporting on tax returns.

Outside of the tax-centered classes, there was also an opportunity to attend a session on the increasing amount of public-private partnerships (P3s) projects that are being utilized to make large projects feasible from a financing point of view. Although the process of getting one of these projects planned, started and actually completed can seem like a daunting task, P3s have been successfully used to complete many projects nationwide that otherwise would have never gotten off the ground. 

Katz, Sapper & Miller has professionals who specifically focus on construction accounting, tax and consulting matters. If you have any questions about any of the topics discussed here, please do not hesitate to contact us.

About the Author
Ben Lyon is a director in Katz, Sapper & Miller’s Construction Services Group. Ben assists contractors with business, tax, and accounting strategies that help grow their bottom line. Connect with him on LinkedIn.

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