Expense reporting is a common and necessary business practice. It’s also commonly abused, and in extreme cases, used to conduct fraud. In fact, the Association of Certified Fraud Examiners (ACFE) reports that the estimated median loss from expense reimbursement fraud in 2014 was $30,000. In addition, ACFE findings show that individuals perpetrate such schemes for at least two years before being discovered.
When you also consider that nearly every employee within a business has the opportunity to submit expense reports for reimbursements, you begin to further understand the magnitude of this threat.
Expense reimbursement 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.
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 types of expenses being reimbursed.
When there is a breakdown in controls, a number of fraudulent schemes can take hold.
The Many Tactics of Fraud
Today’s scanners and laser printers have made it easier to fake and alter receipts. This underscores the need to verify reports. Beyond fake receipts, there are numerous ways to cheat an employer.
- Double billing. In this scheme, employees charge something to the company credit card for reimbursement and also 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 transactions.
- Reporting more than actual costs. A taxi ride, for instance, is only $5 but is submitted in a reimbursement request for $10. Internal policy may require receipts only for amounts over $25; therefore, no receipt is available for scrutiny in this case.
- Claiming non-business-related charges. It’s not uncommon when employees who are required to travel believe that 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.
- 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. She is reimbursed yet also returns the office supplies for a refund or store credit.
- Falsified claims and faked business trip expenses. Another common fraud scheme involves purchasing a first-class ticket then cashing it in for two coach tickets in order 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 wife or a girlfriend was present.
How to Mitigate the Risks
There are a number of controls and policies companies can adopt to combat expense reimbursement fraud, starting with defined travel policies and enforceable ramifications for violation. A common best practice is a “pre-trip” approval for all estimated costs, including food and non-flight/lodging costs.
Companies should further take advantage of technology by integrating apps with corporate 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.
Other automated expense 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 activities are also critical. 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 or not those employees are actually the “heavy travelers,” then investigate accordingly. Audit expenses after the fact. Automated travel and expense tools can flag “out of policy” expense reports, which can be investigated and resolved accordingly.