Fraud & Embezzlement—Coming Soon to a Firm Near You

Since 2005, I’ve taken a keen personal and professional interest in understanding how and why fraud and embezzlement happen in this industry. Fraud and embezzlement convictions at design and environmental firms get reported roughly once every six months. However, they are both the first cousins of the cockroach—when you see one, there are usually multiple others hiding somewhere else in the dark. So, figure the incidence of fraud is a lot greater than what is made public. Here’s what I’ve learned over the years. I hope it helps to protect you and your firm. 

When it happens: In my experience, fraud tends to be most prevalent in the good times—when firms are having their best years financially. Individual bonuses are big. Optimism and self-confidence are high. Leadership teams have let their guards down. Everyone is having a good time. The leadership team is on top of the world—has all the answers. Sun on their faces, wind in their sails vibe. Salad days. THIS is when it’s easiest for the insidious “skimming off the top” to take place. Small dollar amounts stolen, diverted, or siphoned over time have a greater probability of being missed, ignored, or just not scrutinized when the cash is flowing through a firm at levels never seen before by management. (Related: How’s your firm doing this year?)

Where it happens: Ninety-nine percent of the time fraudulent activity starts in the office of the CFO. The other 1% results from collusion between a technical professional and someone from the CFO’s office. Look, all you CFOs who are still reading my stuff even after my article from January 2022, “Your CFO and CMO—Innovation Killers or Innovation Champions,” I’m NOT saying that this is happening in your firm (sheesh). I AM saying when fraud happens in the industry, it’s the CFO’s office where it starts. (Here’s to 2023 being another year where I don’t get invited to speak at any industry CFO conferences.) Check out the reports of industry fraud and embezzlement. The headlines are never “Architect convicted of stealing from her company.” They are, however, “Controller pleads guilty to defrauding design firm.”

How it happens—“Undercover of the Night”: Fraud and embezzlement in the industry fall into two broad categories. Common to both is a bad apple in the mix with check-writing authority. Fraud in the first category takes advantage of (to the non-initiated or non-interested) seemingly complex AR, AP, and expense processes. It navigates an accounting maze to yield a steady stream of illegal lucre for the thieves. We join our defrauders in flagrante. Here are quotes from some of the dirty doings: “She was responsible for preparing checks drawn on the company’s checking accounts…and forged the signatures of the company owners and other authorized personnel on hundreds of company checks…” “He wrote payroll checks for himself and checks ostensibly for petty cash…” “The scheme involved shifting funds and fabricating entries in the firm’s books and records to cover up the fraud…” “She would issue checks from one of the firm’s major accounts and deposit them in various personal accounts…” “The defendant embezzled money using the firm’s master cash disbursement account by issuing multiple unauthorized checks to himself…” “He transferred funds from the firm’s benefits account into a portfolio of unauthorized accounts opened in the name of a firm subsidiary and wrote checks to himself and others.” Firms—big and small—just do not have the right or enough controls in place, or they don’t implement them. Smaller firms—ones running on a cash rather than accrual basis—are particularly vulnerable.

How it happens 2—Eternal Sunshine of the Spotless Mind: Embezzlement in the second category is more brazen—and one can legitimately scratch one’s head how it goes on for so darn long without being caught. We return to the scene of the crime…“The firm has discovered almost $1.6 million in thefts from charges on its corporate debit card, which it says was only authorized for purchasing office supplies and equipment.” “The defendants (yes, plural!) transferred over $91,000 from the architecture firm to a fictitious law firm that they incorporated and forged false documentation that appeared to authorize the fraudulent transactions.” “The defendant worked as an office manager for the landscape architecture firm and oversaw payroll for the business. The firm’s owner learned of the alleged crime only after another worker noticed a $9,000 charge in the company’s bank records that couldn’t be explained. This was after the defendant allegedly made 430 (!!) (exclamation marks added for—well, exclamation by me) unauthorized transfers from the company’s account.” I could go on, but you get the picture. This isn’t exactly Ocean’s Eleven

Why it happens 1—Willful ignorance: That old chestnut about design and environmental professionals not being wired to understand financial reporting? That sets the table for fraud. Simply put, when the conversation turns to financials, many professionals lose intellectual altitude at a rapid rate. Management teams or boards composed of engineers, architects and environmental professionals are generally very good at understanding utilization (aka chargeability), revenue, and profit KPIs. However, labor multiplier? Hazy concept. Expense line items beyond labor categories? Even cloudier. Balance sheet metrics? Deferred liabilities? Contra-equity accounts? Now we’re talking Greek. (Full disclosure: I had four years of ancient Greek in high school, and I still have some issues reading a balance sheet.) Lack of financial acumen among firm leaders and owners sets up the ideal environment for an embezzler to thrive. 

Why it happens 2—Team dysfunction: You’ve read it, you love it—The Five Dysfunctions of a Team by Patrick Lencioni. Principals hate (fear) looking vulnerable (ignorant) in front of their peers. So, when hard-to-grasp financial topics are on the agenda, many defer to nodding sagely or feigning interest in the discussion while covering up the fact that they have no idea what is being discussed. A corrupt (or corruptible) financial manager can sniff this dynamic out after about a year. And then the question in their mind becomes, “So much money, so much ignorance, so little accountability, why not?”

Why it happens 3—“Back in the High Life Again”: Never once have I seen the funds from a reported case of fraud or embezzlement being deployed to fund an orphanage or building affordable housing. It’s always for cars, boats, real estate, trips, and bling. All these items are clearly beyond the legitimate purchasing capacity of the thief. When the bad actor gets questioned about their seemingly incompatible lavish lifestyle, the typical answer is that it’s being funded by a spouse, partner, or an inheritance.

Who and what it hurts: Your team (it kills trust in each other). Your owners and your people (reduces compensation/bonus potential because you NEVER get to claw back the full amounts that were stolen). Your brand (“Hey, work with us, we can’t manage our own assets, but let us manage yours!” is not a winning pitch). Your culture (your team lives with the assumption that everyone shares the same stated shared values, only to find out that there is someone “trusted” on your team—sometimes someone in a leadership position—who has been systematically screwing you over. Tough to come back from that.).

When it gets found out: Generally too late. Five to ten years is not unusual. That’s a lot of cash leakage. (Thieves and liars tend to get sloppy or careless.) Or it gets discovered in due diligence when you try to sell or recapitalize your firm, which is (a) too late, (b) could kill the deal and, (c) is a super expensive way to manage your finances. Related, I just spoke with a CEO of a highly acquisitive firm who cited a 5% incidence of finding fraud during due diligence. 

“Looking for Clues”: (This is the third and final ‘80s song reference in this article.) Are your financial reports always delayed? If so, then get worried and get help. Why? It’s similar to the core business trick of unscrupulous landscapers/snow plowers. They bill you 90 days (i.e., an eternity) after the service is delivered. So, you can’t remember if they mowed your lawn four of five times last May, or if they plowed your driveway three or seven times during those snowstorms last January. Well, you might remember—but that would take time and work and research. So, instead you just pay the bill. That’s what they are banking on. That you will not take enough time to scrutinize the bill so they can slip one by you. Same with fraudsters. Delay the financials. Release them 90 days later. You’ve already moved onto the next fast-moving crisis/challenge (see last week’s article, “An Industry and a Firm in Beta Mode—What Could Possibly Go Wrong?”), and so, you don’t pay close enough attention to the financial details.

What you can do: Get a paid third set of eyes to scrutinize your monthly financials (non-executive board members, auditors, accountants). Have a whistleblower option available for staff to report suspected fraud. Make sure your financials are delivered in a timely manner. Be vigilant. Trust but verify.

“The world is a fine place and worth fighting for”: (Hemingway) During these good times, don’t let down your guard. As a leader your job is to strive to build a great firm—through good times and bad. Don’t let fraud get a foothold in your firm.

You can reach Mick Morrisey @ 508.380.1868 or [email protected].

Get Better at Deciding

The blinding acceleration of AI, a whacky economy, social upheaval, annual 100-year storms, and red-hot global tensions—is it any surprise that instability is being internalized as the new normal? If you thought you had a lot of decisions to make during the pandemic, you ain’t seen nuthin’ yet. The next five years could be the most challenging you’ll experience as a professional. A myriad of decisions will need to be made, like which services to grow, which markets to exit, how to partner with technology, and so on. So, you’d better get better at deciding.

Even in the most collaborative of strategic planning settings, when decisions about a firm’s future are being weighed, the discussions I observe are often more about advocacy than inquiry. Instead of sharing ideas, improving them, and collectively deciding on a path to pursue, people are out to win. Think about the meetings in your own firm—when ideas are thrown on the table, is it the best idea that wins the day or the strongest advocate? When it’s the latter, the outcome is inevitably the lousy execution of a poor decision.

Productive discussions are conversations found smack dab in the middle of advocacy and inquiry, and they result in the group coming to some sort of closure, such as achieving alignment around a vision statement, making the decision to recapitalize, or prioritizing the opening of a branch office in one city over another. Through productive discussion, the group learns to put its thinking on display, draw out and test assumptions, and examine the reasons for disagreement. Like anything, practice improves quality. In this case, it’s thinking and interaction that develop. 

In any event, here’s what to focus on:

1. Yourself.  Become increasingly self-aware of the outcomes you want to achieve in the discussion and notice how those goals affect what you think and say; how you listen; what, if anything, triggers you; your tone; and your disposition when people agree and disagree with your ideas and proposals. 

2. The happy place between advocacy and inquiry.  Too often I see executives challenging each other’s ideas to position themselves in one way or another. They are not sincere challengesespecially when they are inconsequential—which often results in the conversation turning into an argument. Purposeful challenging is an examination of assumptions and the thinking behind them. Being heavy-handed with advocacy leads to misunderstandings, miscommunication, ungrounded assessments, and unsound decisions.

3. Vocabulary.  How many times have you shared a thought or made a request, and you could not have been clearer, yet you were entirely misunderstood? Join the club. It happens to all of us. Words and phrases mean something specific to you yet can represent something much different to others. There can be seemingly endless interpretations of what we think has a single, obvious meaning. In productive discussions, people confirm the meaning of words and phrases. But since discussions are often rushed, people end up using language in a sloppy or thoughtless way. For a variety of reasons, the conversations roll on without anyone calling a timeout to confirm the meaning of what’s being communicated, and the team disperses with a tenuous grasp of what was just decided, agreed upon, or discussed. Or worse, they might have completely misunderstood what transpired and taken any number of counterproductive actions as a result.

4. Self-discipline.  When your passion gets the better of you and you feel your blood pressure rising, step out of the batter’s box and ask yourself the following:

  • What’s going through my head?
  • What emotions am I experiencing, and how are they affecting me?
  • What do I want right now? 

When you practice that kind of self-discipline, you will begin to make discoveries about your own assumptions and possibly those of the group, which you can then address: “You know, this direction you are advocating implies an assumption about our marketing strategy, so let’s explore that assumption,” or, “When you say that we should move into that region, I find myself becoming concerned because of the demographic shift we’ve been observing in that area,” etc. By giving the reasons for your concern, you invite the group to help you test your own assumptions and open your mind to the possibilities.

5. Stalemates. Agreeing to disagree is not closure, so figure out what the group agrees on and what they don’t agree on. Then, identify the source of the disagreement. Usually, the disagreement will revolve around one or more of the following:

  • Data and facts—what’s real and accurate, and what isn’t?
  • Goals—what are we trying to accomplish?  
  • Methodologies—how should we accomplish it? 
  • Values—why do we think we have to be, act, and do things a certain way, and why do we believe what we believe?

Helping the group to discover the source of disagreement can go a long way in getting everyone unstuck and moving in a positive direction.

Meet Mark Goodale at Morrissey Goodale’s Western States M&A, Strategy, and Innovation Symposium June 7-9 in Las Vegas.

Market Snapshot: Power and Energy (Part 1)

Weekly market intelligence data and insights for AE firm leaders.

Overview

  • The power and energy category of construction constitutes power plants (nuclear, oil, gas, coal, wood), nuclear reactors, hydroelectric plants, thermal, and wind and solar energy facilities. 
  • Within electric distribution, structure types include electrical substations, switch houses, transformers, and transmission lines.
  • The power and energy category also includes buildings and structures focused on distribution, transmission, gathering, and storage of oil and gas.

Market Size

$110.3 billion*
*Based on 2022 Value of Construction Put in Place (CPiP) (U.S. Census Bureau)  

Outlook

  • Power infrastructure construction starts are expected to have double-digit annual increases in 2023 and 2024.
  • Recent federal government policies and enacted funding have accelerated investments in renewable energy sources and technologies. The Inflation Reduction Act includes $369 billion in incentives such as tax credits, grants, and low-cost loans.
  • Grid modernization and flexibility are among the energy sector’s priorities. The country’s transmission capacity will need to double by 2030 to enable an energy transition from fossil-based systems to renewable sources. Infrastructure improvements are necessary to accommodate vehicle electrification trends.
  • The Infrastructure Investment and Jobs Act includes programs focused on preventing outages and enhancing resilience of the electric grid. The U.S. Department of Energy is managing several programs under the “Clean Energy and Power” category, totaling more than $70 billion in funding between 2022 and 2026. An example includes a $3 billion grant program ($600 million annually) targeting smart grid investments for utilities.
  • In addition to incentives, lower operating costs are driving renewables’ generating capacity. Solar is expected to increase capacity by 40% in 2023 (from 72 to 101 GW).
  • Elevated levels of spending will continue for energy and utilities companies. In addition, states with significant power deficits may need more improvements and expansion of transmission line infrastructure.

In next week’s issue, we’ll look at trends and hot spots for this sector. To learn what’s ahead for other markets, consider attending the Western States M&A, Strategy, and Innovation Symposium on June 7-9 in Las VegasThe #1 business networking and education event for AE industry executives and investors interested in growing in the West.

To learn more about market intelligence and research services from Morrissey Goodale, schedule an intro call with Rafael Barbosa. Connect with him on LinkedIn.

Weekly M&A Round Up

Congratulations to K Friese + Associates (Austin, TX): The prominent Texas civil engineering firm that provides water/wastewater, drainage, transportation, aviation, and municipal services joined industry leader Lochner (Chicago, IL) (ENR #128). The partnership with K Friese enables Lochner to establish and grow water and drainage services as a core component of their infrastructure platform; enhance highway, bridge, aviation, and transit and rail service offerings; and diversify their client base to include municipal-oriented organizations in Texas and beyond. We’re thankful that the K Friese team trusted us to initiate and advise them on this transaction.

Another congrats to LRE Water (Denver, CO): The expert in water resource consulting and environmental management partnered with Union Park Capital (Boston, MA). LRE Water will serve as the pillar of water expertise in Union Park’s Spheros Environmental Group. We feel privileged that the LRE Water team trusted us to initiate and advise them on this partnership.

Additional domestic deals in CO, AZ, TX, FL, ME, SC, and OH: Last week we reported a total of eight domestic deals and nine international deals. Register today to join industry executives, dealmakers, and investors in Las Vegas on June 7-9 to learn more on the latest happenings in the industry at our Western States M&A, Strategy, and Innovation Symposium. You can check all the week’s M&A news here.

Searching for an external Board member?

Our Board of Directors candidate database has over one hundred current and former CEOs, executives, business strategists, and experts from both inside and outside the AE and Environmental Consulting industry who are interested in serving on Boards. Contact Tim Pettepit via email or call him directly at (617) 982-3829 for pricing and access to the database.

Are you interested in serving on an AE firm Board of Directors? 

We have numerous clients that are seeking qualified industry executives to serve on their boards. If you’re interested, please upload your resume here.

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