Australian Construction fraud costs estimate at $5 billion per year

“Fraud is everywhere and takes many forms. It poses a significant threat to the profitability of clients.” - Grant Thornton Australia Forensic Consulting Partner, Chris Watson.

A little over a year after they self-reported potential bribery and corruption issues in the wake of the Securency scandal, another bribery and corruption imbroglio surrounds Leightons.

Allegations that Leighton Holdings paid “facilitation fees” and had a culture of corruption throughout its organisation has been damaging to both the reputation and financial position of Leighton Holdings, with shares dropping by 10% once the story broke.

Alarm bells were clearly ringing somewhere at Leightons’ executive levels. However, Grant Thornton International’s upcoming report, Unravelling the truth: Insights on Real Estate and Construction Fraud (due for release on 23 October), shows construction companies in Australia and around the world are still failing to acknowledge it as a significant issue and as a result, are unaware of the impact it is having on their businesses.

It’s time that businesses accept that fraud and corruption exists in all facets of the Real Estate and Construction industry. From falsely representing the numbers of hours a contractor works, through to collusion when bidding for contracts and the payment of bribes to secure a contract, fraud dramatically increases costs and, in the case of bribes, inflates the contract price. And of paramount concern, as we have seen with Leightons, is the negative impact an investigation can have on an organisation’s reputation.

Despite these risks, many Real Estate and Construction firms doing business around the world have had to accepted fraud and corruption as ‘a cost of doing business’. The dollar figure attached to that ‘cost’, though difficult to pinpoint, is by no means insignificant. Predominantly due to lack of awareness and the desire to keep investigations in house, there are no authoritative figures on the scale of fraud in the Real Estate and Construction industry and under-reporting of cases is so widespread that the full scale is difficult to quantify.

According to the Australian Bureau of Statistics (ABS) in 2010/11 the construction industry employed around one million people and produced AU$102 billion of value, equating to 7.7% of the total economy. Applying the Association of Certified Fraud Examiners 2012 global estimate of 5% of revenue lost to fraud, would give a total estimate of AU$5 billion in construction fraud per year.

Bribery and corruption are particularly associated with dealings with other countries, particularly those in the Pacific Rim. China has a well-documented history of fraud in construction with bribes of under US$1,500 for individuals and US$15,000 for companies not even regarded as criminal offences. The 2012 report on implementing the OECD anti-bribery convention noted with disapproval the lack of successful convictions for bribery of foreign public officials in Australia.

Now more than ever, there can be no doubt that companies must review their contracts, agents and overseas projects to satisfy themselves that they won’t fall foul of the same reputational and potential financial ramifications.

Companies must recognise they are vulnerable to fraudulent activity and that action needs to be taken in order to drive down the cost of fraud to the industry.

It’s time for Boards to acknowledge that demonstrating strong internal governance on these issues is paramount.

Recognising fraud and corruption are a risk to their business and addressing it openly, rather than the historical ‘behind closed doors’ approach, which has been ineffective.

-ends-.

For more information or to speak with Chris Watson, please contact:

Helina Lilley
National Public Relations Manager
T  +61 2 8297 2421
M  0437 725 520
E helina.lilley@au.gt.com

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