Expense fraud prevention and monitoring

Expense reporting is a common and necessary business practice. It’s also commonly abused and, in extreme cases, used to conduct expense fraud. In the 2024 report by the Association of Certified Fraud Examiners (ACFE), the estimated median loss from expense reimbursement fraud was $33,000. In addition, ACFE findings show that individuals perpetrate such schemes for an average of 18 months to two years before being discovered. This highlights the critical need for robust fraud detection systems and fraud prevention platforms in organizations.

When you also consider that nearly every employee within a business can submit expense reports for reimbursements, you begin to further understand the magnitude of this threat and its potential financial impact on organizations. Fraudulent disbursements through expense report fraud can significantly affect a company’s bottom line, making the implementation of effective fraud detection tools and financial services fraud detection crucial.

Monitoring the expense reporting process

Expense fraud can be difficult to monitor and manage, even for the most sophisticated companies. Internal controls can break down, people get busy. Sometimes the controls are not designed properly in the first place (the process lacks a step for review and approval). Other times, they are not operating properly (someone who is supposed to review dates and the validity of charges isn’t doing so). Layoffs and short-staffed situations in accounting and internal audit departments can mean fewer employees are available to verify expense reports and conduct thorough expense audits.

Relying on manual systems introduces further risk for human error or misappropriation, as does a too-high minimum threshold for receipt requirements. Minimum threshold requirements for reimbursement should be as low as $25 or $50, depending on the nature of the business and the types of expenses being reimbursed. Implementing robust expense tracking and fraud detection systems can significantly mitigate these risks. Advanced solutions like Expensify reimbursement and Navan reimbursement platforms can streamline the process while enhancing security.

When there is a breakdown in controls, several fraudulent schemes can take hold, leading to substantial financial losses for companies. It’s crucial to be aware of the red flags for expense reimbursement schemes to catch potential fraud early. Fraud detection techniques such as anomaly detection, real-time data analysis and machine learning algorithms can help identify suspicious patterns in expense reports, reducing the risk of false positives in fraud detection.

The many tactics of expense fraud

Today’s scanners and laser printers have made it easier to fake and alter receipts, leading to an increase in receipt fraud. This underscores the need for rigorous receipt verification processes and methods for detecting fake receipts. Beyond fake receipts, there are numerous examples of expense fraud and ways to cheat an employer through expense account abuse and mischaracterized expenses. These expense reimbursement schemes include:

• Double billing
  In this scheme, employees charge something to the corporate credit card for reimbursement and submit a personal expense reimbursement with a receipt attached for the same charge. Or they submit the same charge twice but in different time periods, six months apart for instance. By using automated expense management software, a company can implement controls that will automatically send alerts about duplicate submissions.
  
  
• Reporting more than actual costs
  A taxi ride, for instance, is only $10 but is submitted in a reimbursement request for $15. Internal expense policies may require receipts only for amounts over $25; therefore, no receipt is available for scrutiny in this case. This is often referred to as padding fraud or overstated expenses.
• Claiming non-business-related charges
  It’s not uncommon when employees who are required to travel believe their companies “owe” them for being on the road. They then justify personal or indulgent purchases, like buying sweatshirts for the kids or splurging on an excessively large and expensive dinner. This is a form of travel expense fraud that can be detected through advanced fraud management software and behavioral biometrics analysis.
• Over-purchasing, then returning
  The scenario goes like this: An employee buys an abundance of office supplies and submits the purchase for reimbursement but holds onto the receipt. They are reimbursed yet also return the office supplies for a refund or store credit.
• Falsification of expenses and faked business trip expenses
  Another common fraud scheme involves purchasing a first-class ticket and then cashing it in for two coach tickets to take a family member or friend along. A similar scheme is falsifying who was present at a business dinner by claiming business associates were present when, in fact, a significant other was present.

These fraudulent claims, including falsified claim expense fraud and inflated claims expense fraud, can lead to significant expense reimbursement fraud, impacting a company’s bottom line and highlighting the importance of understanding expense fraud risks. Implementing fraud detection solutions that use behavior analytics platforms and device intelligence can help identify unusual patterns in employee behavior related to expense submissions.

Expense policies to help mitigate the risks

There are several controls and policies companies can adopt to combat expense fraud, starting with defined travel and expense policies and enforceable ramifications for expense policy violations. A common best practice is a pre-trip approval for all estimated costs, including food and non-flight/lodging costs. This can be facilitated through customizable workflows in fraud prevention software and identity verification solutions.

Companies should further take advantage of data analytics and technology by integrating apps with corporate credit cards and having receipts electronically submitted directly from hotels, for example, so they become harder to alter. The same can be done with smartphones that immediately upload receipts to prevent them from being lost or altered, reducing the risk of receipt alteration. These processes can be enhanced through automated data extraction and optical character recognition technologies

Other automated expense management systems and spend management tools can be used to integrate corporate card data and allow for quicker reconciliation and reimbursement. This makes it harder to falsify charges, especially when using a mandated corporate card program. Companies can also consider integrating a booking tool with an expensing tool for added checks and balances.

Monitoring for fraud detection

Monitoring activities are also critical for expense fraud detection. For companies that allow a minimum charge threshold before requiring a receipt, run reports on the travelers with the largest number of below-the-line charges. Think about whether those employees are the heavy travelers, then investigate accordingly. Conduct regular expense audits after the fact. Automated travel and expense reporting software can flag out-of-policy reports, which can be investigated and resolved accordingly.

Implementing robust approval workflows, conducting regular compliance checks and providing comprehensive expense fraud training for employees on expense policies are all crucial fraud prevention measures. By combining these strategies with advanced expense fraud prevention technologies, companies can significantly reduce the risk of fictitious expenses, inflated expenses and other forms of expense manipulation.

Compliance teams play a crucial role in overseeing these processes and ensuring that expense fraud policies are followed consistently. They can also help identify potential expense fraud schemes and implement measures to prevent them, thereby reducing the cost of fraud. Transaction monitoring and rule-based systems can be employed to automate much of this process while credential intelligence can enhance security measures.

Wipfli can help with expense fraud prevention

Expense fraud remains a significant challenge for businesses, but with the right combination of policies, technologies and oversight, it’s possible to minimize its occurrence and financial impact. By staying vigilant and employing a multifaceted approach to expense fraud prevention, organizations can protect their bottom line and maintain financial integrity.

For more information visit our audit and assurance service page and speak to a professional.

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