By: Mike Ervin CPA, CFE
Let’s say that a client recently caught one of his employees falsifying an expense report. Your client fired the person, but because the fraudulent amount was fairly small, the company decided not to prosecute. Case closed? I hate to burst your bubble, but no. When it comes to expense account cheating, where there is one there is usually more.
It’s an unfortunate fact that the same conditions that make it possible for one employee to cheat may help others submit false expense reports. Think of it as a domino effect; small amounts often add up to big losses when several employees and multiple reports are involved in fraud.
Opportunities for expense account cheating
Sadly, there are many ways to cheat on an expense account. A common method is to mischaracterize business expenses — using legitimate receipts for non-business related activities. For example, if Linda treats her friend Sophie to a birthday dinner, that generates an actual receipt, but it shouldn’t show up on Linda’s expense account.
Requesting multiple reimbursements is a bit more risky, but it’s just as simple. If Linda wants her company to pay for Sophie’s birthday dinner twice, she simply copies the receipt and turns it in on another expense report. Even worse, she may try to be paid once for the bill, once for the receipt and once for the credit card statement.
Some workers overstate their expenses by simply doctoring the supporting paperwork by changing the numeral “3” to an “8” on a receipt. There are also cheats who invent expenses. An example of this is the employee who asks a taxi driver for an extra receipt then fills it out and turns it in for reimbursement.
All of these small expense account infractions can add up to huge sums of money. For instance, a top salesperson who traveled extensively for business defrauded his company of $30,000 over the course of three years by adopting a liberal definition of “allowable” business expenses. If tighter policies on fraudulent claims were in place, that company may not be out $30,000.
Enforce your policies
Expense account fraud could be averted in most cases, if companies would simply implement fraud control policies and procedures and then enforce them. Unfortunately, many companies establish policies but then fail to make sure that they’re followed correctly. Or worse, they put fraud control policies together that leave large gaps or “loopholes” for employees to take advantage of.
Once your company has an expense report policy in place, communicate it. A solid policy can prevent misunderstandings and make punishing infractions easier.
Moreover, your managers should keep on top of employee business travel plans and other activities that might trigger expense reports. Let’s look at Tom, who is based in Cleveland but submits a bill for a dinner in Dallas. His supervisor should have known about the trip before it happened. The supervisor should review every expense that Tom turns in and require original receipts for everything. If a photocopied receipt is necessary, the supervisor should inspect it for signs of tampering. This also means that expense reports should include details of the company and specific individuals that are being entertained, to allow for follow up related to sales generated and evaluation of effectiveness of the expenses incurred.
Even though expense tracking software isn’t a substitute for hands-on expense account reviews, it can certainly help you spot inconsistencies that develop over time. Such programs make it easy to see if an employee’s expenses have soared in recent months or are noticeably higher than normal.
Also consider a confidential fraud-reporting hotline. It will encourage anonymous reports of misdoings and signal that the business is serious about eliminating fraud.
“Reasonable” is the key word
Businesses must ensure that their antifraud policies are reasonable. If the official definition of reimbursable expenses is too narrow, some employees may be inclined to lie on their expense accounts to make up for out-of-pocket expenses.
It’s also critical to hold everyone in the organization to the same standards. Even a CEO shouldn’t be immune from approval and scrutiny from the appropriate level. A CEO who cheats on an expense account may also be perpetrating other forms of fraud, such as falsifying financial records. This in turn teaches employees that “If the CEO can falsify records, why can’t I?” Managers might be surprised to see how much their employees pay attention to their own behavior at work. If it’s not acceptable for one, it should not be acceptable for any.
Enlist an expert
If a business contacts you about possible expense account cheating, help the client understand that the incident may not be an isolated one-time problem. Bring in a fraud expert to investigate the claim and possibly to review the company’s expense reporting policies and internal controls.
If you suspect expense account cheating is going on at your business, contact us here, or call us today at 716-847-2651