HOW TO PREVENT AND DETECT EXPENSE ACCOUNT FRAUD
Darrell Smith CFE, ARM, CIM, FCSI
It’s hard not to have noticed all the corporate executives and politicians who have been accused of expense account fraud. With executive salaries, do they do it because they have financial problems? Probably not, they could be living beyond their means, but a more reasonable explanation is greed. That they felt they were entitled to fudge their expenses and they could get away with it. They have justified it by thinking this is acceptable behaviour or rationalizing everybody is doing it so why not me.
It has been estimated that 21% of all fraud committed in organizations is expense account fraud, costing millions of dollars a year. Small businesses suffer greater losses mainly because they don’t have such elaborate expense tracking systems.
There are basically four types of expense account fraud;
1. Mischaracterized Expense Reimbursement: This is when an employee uses a personal expense and claims it is business related. EG: Employee claims office supplies for a home business they have.
2. Overstated Expense Reimbursement: The employee overstates the amount of an expense, such as taking a $10 cab fare and claiming $20.
3. Fictitious Expenses: This is when they create a fake expense that does not exist and a fake expense form. An example is claiming a lunch with a client that did not occur.
4. Multiple Reimbursements: This is when the employee submits the same expense several times. Such as an airline ticket, where they put it on their credit card and get reimbursed and then they submit the airline ticket for a second reimbursement.
1. Historical Comparisons: Compare employee’s expense reports for the last 3 years and compare it with other employee expense reports. It helps to see each employee’s expenses in a graph and then to graph all employees’ expenses combined.
If total company employee expenses have increased by 3% but one employees expenses have increased by 20%. That is something to look at and determine why.
2. Detailed Review of Expense Reports: This is the most effective method where the employee’s expense account is audited, with all expenses being matched by receipts. Using the employee’s digital calendar and schedule allow cross reference between where they were, who they met with and what expenses were incurred.
Expenses Account Fraud Prevention:
1. Have a company Expense Policy outlining what expenses can be reimbursed, what is required to get them reimbursed and what are the consequences of submitting fraudulent claims. The employee should then have to sign it and be given a copy. This could be part of the Code of Conduct or a separate policy.
2. Ensure that only expenses with an attached receipt along with the explanation for that expense will be reimbursed. For entertainment an explanation of the receipt should include business purpose, and who the customer was. Also date and time when incurred, the place and the amount. This is a common theme I see in expense reimbursements. Where an employee submits an expense without the receipt and have an excuse for not having one. They get reimbursed and that sets the tone for submitting a similar expense without a receipt.
3. The person who approves the expense claims, give them the power and authority to question any expense even senior management and give them a clear chain of command to take the discrepancy to a higher authority. Encourage the employee and praise them when they detect a discrepancy.
4. Company Credit Cards issued to employees for expenses, the statement should go directly to the accounting department.
5. Conduct regular audits to ensure the company policy is being followed and to detect any discrepancies. The audits could be on a monthly or quarterly basis and any discrepancies should be brought directly to the employee who submitted the expense. For smaller organizations who do not necessarily have the time or expertise to do audits, it could be contracted out to an outside firm. Regardless the audits must be done.
Kilometers reimbursement is an area of abuse. The employee travels and total kilometers is actually 165, yet they submit 221. At $0.45 per kilometer, that’s an additional $25 the company has to pay out in fraudulent reimbursements. This can add up very quickly if you have numerous employees submitting expenses. An easy way to check is to just use Google Maps by entering the starting point and then choose destination and see how many kilometers it is.
I once audited a sales person at a Pharmaceutical company who had claimed over 90,000 kms in mileage, when we checked his vehicle, it had 22,000 kms on it. (The vehicle was company owned). This was over 68,000 kms at $0.45 per kilometer for over $30,600 in fraudulent mileage claims. The employee was fired, because when we checked, not only was he submitting false expenses but he was also submitting false customer sales calls. Some clients had not seen him in over 2 years.
6. Understand your corporate culture. In some organizations there is a culture of everybody is doing it, the company doesn’t mind. So why shouldn’t I do it? To manage this you have to have clear policies and procedures, educate the staff that this is wrong and is considered fraud, and how it affects the company’s bottom line. Also ensure management and executives are leading by example.
7. Have a whistle blower hotline to make it easy and anonymous for employees to report wrongdoing. Such as our www.workplaceviolationshotline.ca.
In summary, have an expense account policy, only reimburse expenses that have a legitimate receipt, with an explanation for the expense and make sure to conduct regular audits. You may not eliminate all expenses account fraud, but with proactive policies you will reduce the frequency and severity of losses.