Unlike other types of fraud which may require access to company financial systems or be restricted to only employees with authorization to spend or commit company resources, expense fraud can be committed by any employee who can claim reimbursement for expenses. And since it can be widespread, it’s especially dangerous when it’s ingrained in the culture of a company.
In its 2016 Global Fraud Study, the Association of Certified Fraud Examiners (ACFE) reported that expense reimbursement fraud lasted a total of two years before being detected. And executives and upper management were the most frequent perpetrators of this kind of fraud. This creates a culture of non-compliance that trickles down through the company, amplifying the damage and eroding trust.
What is Expense Reimbursement Fraud?
According to the ACFE, expense fraud falls into four main categories:
- Mischaracterized expenses: An employee claims a personal expense for reimbursement as a business expense.
- Overstated (or inflated) expenses: An employee submits a claim for a legitimate expense, but increases the amount.
- Fictitious expenses: An employee submits a fake expense and/or false receipts for reimbursement.
- Multiple reimbursements: An employee submits the same expenses and receipts more than once for reimbursement.
These are the four main expense reimbursement schemes, but employees can, and do, use many variations of these schemes to defraud employers.
You’ve identified expense fraud. Now what do you do? Download the free cheat sheet: How to Confront Employee Theft.
How Much Does Expense Fraud Cost?
While expense fraud can be damaging for companies of any size, it impacts small businesses more keenly than larger ones. With an estimated median loss of $40,000, according to the ACFE, expense fraud can devastate a small company that operates on small margins.
Add to that the fact that small companies with fewer than 100 employees have a higher percentage of expense fraud than larger companies, possibly due to less sophisticated monitoring systems and policies, and you have the potential for this to be among the biggest fraud risks for small companies.
Common Expense Fraud Schemes
The most common expense reimbursement schemes are ones that are simple to orchestrate, and can be attributed to error if an employee is caught. The following simple schemes may be occurring at your company regularly and you can detect them by training employees reviewing expense reports to watch for red flags.
Claiming reimbursement for personal expenses is one of the most common expense frauds. In a 2016 survey conducted by Certify entitled The Top 10 Craziest Business Expenses, employees submitted expense reimbursements requests for a bagpipe player, a blow-up doll and tires for a personal car. And in that survey, nearly one in 10 respondents admitted to knowingly submitting personal items as business expenses for reimbursement.
Red flags for mischaracterized expenses include, not surprisingly, claims for items that don’t seem to have a business connection, claims for meals and entertainment when employees aren’t working/travelling or on weekends, or receipts that include items or meals for children, or from establishments in the employee’s neighborhood.
Detecting overstated expenses can be difficult. Scrutinize all receipts thoroughly. Look for evidence of altered amounts, such as a different type of ink used for the service and the amount or writing that looks different. Compare receipts to receipts from other employees for the same product or service to see if the amounts seem reasonable.
In another simple scheme, an employee might create a receipt for a product or service they didn’t receive and submit it for reimbursement. One common ploy is for the employee to ask a taxi driver for a blank receipt and then fill in the information later. An employee might also create a fake receipt from scratch using an online template, or collude with a merchant to create a receipt for a non-existent purchase.
This is another fraud that’s difficult to detect, but there are a few things that can give it away. Keep an eye out for receipts from the same company in multiple expense reports from the same employee. Compare taxi receipts to dates and times the employee was known to be on company business and flag any that are outside of these times. Compare taxi receipt amounts to online information about costs for the same trips or compare to other employee’s receipts for similar trips.
In this common fraud scheme, an employee submits the same expenses on multiple reports. There are several methods used for this fraud. The employee may submit a receipt with the expense on one report and then claim it again as a “lost receipt” expense. Another method is for an employee to claim for a transportation cost, such as a plane or train ticket, then also claim for reimbursement of the mileage as if he or she drove to the location.
This type of expense fraud is fairly easy to catch if you use software to record and process expenses. Compare dates, amounts and payees claimed on one report to those on other reports from the same employee. Look for evidence of the original version of a lost receipt connected to another expense report. This is another fraud that can be attributed to employee error so it’s important to be careful when detecting it that you don’t accuse the employee before you are sure it was done on purpose.
This is an easy fraud for employees who have booked travel or events that are cancelled. When the employee receives the refund, he or she simply keeps the money. This kind of fraud can be controlled if employees are using company-issued credit cards, but if the claim is submitted for an expense paid for with personal funds, refunds are hard to track.
A 2015 Report from the Global Business Travel Association (GBTA) estimated that companies that track and apply unused tickets can save 5-8 per cent of their annual travel budget, so it’s a good idea to book all events and travel on company credit cards to maintain control of any refunds issued.
Protecting Your Company from Expense Fraud
Keep these prevention tips on hand as a useful reminder. Download the free cheat sheet: 10 Ways to Protect Your Company from Expense Fraud.
- Have a company expense policy. The rules should be the same for everyone and having a formal, written policy ensures that everyone is aware of them. Distribute the policy to all employees and have them read and acknowledge having read and understood it. Include information on how the company handles breaches of the policy and fraudulent expense reimbursement claims. Be specific about the consequences of fraud for the employee.
- Implement controls at the submission stage that apply to every expense claim, regardless of who files it. As we know, executives and upper management are the most frequent perpetrators of expense fraud, so controls must apply to them too. Ensure those implementing the controls understand what to check and why. Provide guidelines to anyone approving expenses.
- Empower approvers to question employees about their expense claims to show employees that submissions are reviewed and checked. Deny any expenses that don’t fall within the guidelines of the company expense policy.
- Implement a secondary control that compares costs and analyzes trends at the end of the expense cycle. Conduct monthly analysis on average amounts of employee claims, by claim type and by total amounts claimed to spot trends and identify areas that need attention. Sometimes it’s just a matter of training or there’s a legitimate reason, but it can also be a red flag when one employee’s expenses are higher than everyone else’s.
- Conduct regular audits of reimbursements to ensure the company policy is being followed by all employees. Bring discrepancies and minor violations to employees’ attention to warn them that their expenses are being monitored.
- Issue corporate credit cards to employees who travel frequently and ensure credit card statements are sent to the accounting department. Ensure that only business-related expenses are charged to corporate credit cards and monitor statements for compliance with the policy. Request receipts for all charges and reconcile statements monthly. Check for refunds and ensure they are credited back to the account.
- Discipline employees who violate the expense policy to ensure everyone knows that the company takes the policy and compliance with it seriously. Don’t make “special” cases for company executives and upper management. Everyone should be following the same rules.
- Provide training to everyone involved in approving expense reimbursements and refresh training at regular intervals to keep the accounting department up to date on policy changes and new types of violations.
- Consider software for managing expenses. By eliminating the manual aspect of reviewing expenses, you will reduce mistakes and generate valuable data for comparison and analysis, allowing you to run reports that flag suspicious transactions. Automating this function can save time and increase control over the process.
- Embed compliance into the company culture by ensuring the leadership team demonstrates their commitment to the expense policy. When a company’s managers and executives follow the rules, it sends a valuable message to all employees that nobody is exempt. Enforcing policies across the board engenders trust and encourages everyone to follow the rules. When leaders follow the rules, employees will do the same.
Having a plan in place can help you respond to fraud faster and more effectively. Download our fraud response plan template to get started.