How to prevent expense fraud

How to prevent expense fraud

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Every company faces it at some point: employees taking advantage of your expense management process. Expense fraud committed by employees is estimated to cost U.S. businesses more than $2.8 billion per year, according to a recent survey by Chrome River.

Being alert to potential problems can help you develop better policies and catch minor infractions before they become more serious.

What is expense fraud?

The ACFE defines expense fraud as fraudulent disbursement when an employee claims reimbursement for fictitious or inflated expenses.

Spend fraud, or expense reimbursement fraud, makes up about 15 percent of business fraud, and is responsible for losses in the millions of dollars across the U.S. according to a study by the Association of Certified Fraud Examiners (ACFE). Reasons may vary, but the result is the same—trusted employees commit fraud and businesses feel betrayed.

Types of expense fraud

Expense fraud can occur anywhere. The following is a list of six common issues to watch for and actions to take if you suspect expense fraud:

1. Inflating or altering acceptable reimbursable expenses

Most employees strive to be honest, but even a good employee can be tempted to alter their expense reports by just a few dollars, especially when using their personal account to cover business expenses. For example, an $8 taxi ride can suddenly become $12. Since it’s such a minimal amount and a standard expense, it’s easy to overlook. Computer software can assist employees in changing receipts to reflect larger totals, resulting in larger reimbursements and expense reimbursement fraud.

Recommendation: Whenever possible, an original receipt should accompany every claim on any spend report. To avoid getting drained by employees’ cash purchases, some businesses put a limit on the reimbursable amount allowed without a receipt. The smaller that amount is, the more protected the company.

2. Fictitious expenses

While these might be rare, forensic accountants do uncover completely fictitious expense reports. Employees invent acceptable and within-budget expenses and submit fabricated receipts for reimbursement.

Recommendation: Require original receipts, prior authorization, and follow-up accountability for proof of purchase and use.

3. Claiming non-business purchases

Regardless of how your employee positions it, a laser light show most likely does not fit within your spend policy. To avoid the temptation of frivolous spending, your company needs to expressly state which types of expenses are allowed to be charged to the business and which types are not. A clear policy helps prevent employee expense fraud, especially the unintentional variety.

Recommendation: Providing training to both managers and employees alike can go a long way to avoiding any confusion or temptation. By leaving some areas unclear, you may be inviting employees to use their own judgement, encouraging them to ask forgiveness rather than ensuring they have permission.

4. Overcharging the company card

Many business owners provide corporate credit cards to employees who do a lot of traveling or entertaining so they don’t have to worry about reimbursement. Corporate credit cards consolidate expenses and spend management, making it easier for your finance department to track trends and verify charges.

However, when you issue corporate credit cards, there’s a risk that employees will spend more than necessary. When the company credit card bill arrives, blindly signing a check and sending it on its way is a risky practice. Review the charges to ensure your card hasn’t become your employees’ personal income subsidy.

Recommendation: One option is to set specific spending budgets for trips ahead of time. This helps to deter employees from overspending, keeps them budget conscious, and encourages accountability.

5. Double dipping

Some employees may list the same charge twice but under different trips. It could be an honest mistake, or it could be an attempt at double-dipping. When you provide company credit cards to employees, you need to be especially diligent about monitoring usage. If not monitored carefully, some employees may make a charge on their company credit cards and later submit a receipt for the same purchase as a cash expense.

Recommendation: Using automated spend management software, it’s possible to put controls in place which automatically alert you to duplicate transactions. This eliminates the need for your finance department to sift through paper statements or old spreadsheets in search of duplicates. It also alerts you more quickly to employee errors or potential expense fraud.

6. Exceeding the limits for allowable expenses

Employees sometimes split large charges into two or three items on the expense report. This can be confusing or even lead to mistakes. Instead of setting limits on individual purchases, you might consider setting spend limits based on a per-trip or per-category cost basis.

Recommendation: Employees who travel for the company will likely have a larger budget than those who entertain partners and clients locally. Establishing this difference in advance will save the confusion of splitting charges on the expense report and doesn’t encourage employees to be creative in submitting their expenses.

How to identify expense fraud

Now that you know the most common ways employees commit expense fraud, how can you identify and stop that fraud?

Monitor spending over time

You should already be monitoring spend reports and have a history of each employee or position. Look at spending trends over time and how they correlate with your ROI. Higher charges should be coming from a high performer who understands the best way to make your dollars count. If you don’t see that correlation in an employee’s spending, you may want to take a closer look.

Comparable positions should have similar expenses

John and Jack both hold the same sales position within your company. If John expensed $5,750, while Jack expensed only $1,500 this month, you may want to take a closer look at John’s expense reports. He could be making exaggerated claims or manipulating the dollar amounts. It’s common sense that employees in similar positions would have similar expenses. A significant discrepancy is a good indicator of a problem.

Verify purchases

An expense line on a bank statement doesn’t tell you everything you need to know. Ask for original receipts, and don’t hesitate to call hotels or vendors to verify large or frequent expenses.

Surprise audits

Spot audits of expense reports can help uncover problems and encourage careful compliance. ACFE says that surprise audits reduce losses by 51% and increase the speed of detection by 54%.

Accountable access

Ensure that all reimbursements or corporate card access is linked directly to an individual for accountability. For example, if you notice that consistent reimbursements or expense reporting is coming from a department instead of an individual, there’s a chance someone is trying to hide purchase details and shirk accountability for spending.

You caught someone committing fraud—now what?

  1. Investigate: Before you jump to conclusion, check the amounts and history to see if it’s an error or a longer pattern of fraud.
  2. Document: Take screenshots and gather a paper trail.
  3. Cut them off: Remove access to accounts and funding before more fraud can occur.
  4. Act: Move forward with a meeting, termination, and legal action if necessary.

Educating employees in advance about your company spending policies and accountability can minimize the risk of employee mistakes or fraud. When those policies are accompanied by an automated spend management system that alerts you to issues in employee spending, it can dramatically reduce the chances your company will fall victim to fraudulent expense report reimbursement and the need for disciplinary action.

Fight expense report fraud with BILL Spend & Expense. Join us in ridding the world of busywork, one expense report at a time.

The information provided on this page does not, and is not intended to constitute legal or financial advice and is for general informational purposes only. The content is provided "as-is"; no representations are made that the content is error free.