I hate to have to talk about this, but it needs to be addressed. Lower than expected margins can be a tip off that someone is stealing from the builder.


Most of us would prefer to close our eyes to the darker side of human nature, since many of the people who steal look like everyone else. In fact, the ability to blend into the crowd are part of many crooks’ MO.  They can be honest and ethical in most things, even go to church regularly. So when they get caught with their hand in the till - fraud or theft is something we still find hard to believe.

Stealing takes many different forms - fraudulent statements, asset misappropriation, kickbacks, corruption - and it is done by many different parts of the organization – accounting, the field, purchasing, and executives. And it is serious. Some forensic accountants estimates fraud contributes to 30% to 50% of business failures.

Let me tell you a little story.

Early in my career, I was hired by a regional home builder whose margins were out of whack. One of the guys I worked with, Dan the controller, was a guy in his early thirties. He was somewhat introverted and a little more reserved than the rest of the office. Dan’s co-workers described him as quiet and even a little difficult to get to know at times. You could see Dan had excellent organizational skills just from the neatness of his desk. Dan never allowed papers to linger there. At the end of the day, he filed everything neatly away in cabinets, locked them, and left nothing on his desk except a computer and a neatly framed picture of a very attractive woman – his new wife. Coworkers thought Dan might even be a little OCD, but they never suspected he had another reason for being so careful.

Unfortunately as the company leadership and my BCG Consulting team were working we realized the process flows and management structure had no cross checks on purchasing. There wasn’t even any control on who added vendors to the accounts payable system. Any one person could add a vendor to the account payable system when two should really have been required. I couldn't tell where, but in my gut I felt somewhere there was thievery at work.

I told the client that in my professional judgement the chance of someone stealing was very high and that they should do it an internal audit.

After I left they did just that. Upon my return my hunch was confirmed.

The auditors found a fishy landscaping vendor, among other things. Trades come and go, and for this reason you should never allow vendors to be deleted out of the accounts payable system. The trail of vendors used and paid must be a permanent data thread, this is so someone can come back later and follow the trail.

Although the vendor had a very valid sounding name, no one could find this landscape company in Yelp or when quizzed, not one Super knew the name. Neither could anyone in the field remember any work they did. But in the accounts payable system was a record of the company paying the vendor $10K and it was kind of a weird payment. The figure was so just round, and it just sat out there not against a job cost or any lots.

But then again, many of the expenses were not accrued against specific lots because the company was so out of control. In a tightly run home builder you would never see that happen. 

Finally after puzzling over it for awhile, the auditors went to the Dan and they said “Who is the vendor? You signed this check. What is going on?”

Right there he fessed up. 

Dan said, “I was getting married and didn’t have enough money for my Honeymoon so I pay myself $10,000.”

It came as a big shock to the builder but he solved it without involving the authorities. Dan paid all the money back. He lost his job and he had no references. This was still really sad for him because at that time of life Dan was - his late twenties and early thirties – he was just starting to get paid more and hit his stride in his profession.

Bookkeeping fraud is not unique to the housing industry, if some common business processes had been in place, he would NOT OF BEEN SEDUCED. Good Systems will prevent most stressed human beings from being a dumb ass and torpedoing their careers or taking a visiting to the local piss can (my dads name for such places).

To avoid such an unfortunate event, here of some helpful hints:

1.      Have clear control over vendor input into the accounting system to avoid dummy vendors. Audit this list quarterly by operations and senior accounting officials.

2.      Have random, unannounced internal audits (include operations and done by operations professionals (NOT ACCOUNTANTS) and accounting done occasionally by outside accountants.

3.      Always separate purchasing, authorization and paying functions.

4.      Set up either a full purchase-order-and-variance system or invoice-over-budget system.

5. Basic separation of powers needs to be followed.

The moral of all this is don’t tempt people by having single-person oversights of large sums of money. Make sure you honor your leadership role by preventing enticements of poor ethical behavior. The troops may complain about best practices but they will be happier in the end. That is my story, and I am sticking to it.

Professional Builder had an article by Bill Lurz which does a great job of covering the topic. It is called Stop, Thief! Check it out.

Home builders and developers are the backbone of this country. They work hard, take risks, and create more wealth for society than any other sector of the economy. If you are a home builder and concerned about your results - you can do better! If you want to find out more, call me at 303.525.4944 or email me at noellet@buildertools.com and LinkedIn is a great place to find out more about my credentials, background, and references.

https://www.linkedin.com/in/noelle-tarabulski/

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