In its 2020 Global Fraud Study, the Association of Certified Fraud Examiners (ACFE) reported that expense reimbursement fraud lasted a total of two years, on average, before being detected.
With over a quarter of all schemes, 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.
Of course you trust your employees to report their expenses honestly. But experts warn that it’s often the most trusted employees who do the most damage with expense fraud. And while it may look like small-scale theft on the surface, expense reimbursement fraud can add up to thousands or even hundreds of thousands in losses.
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 reimbursement fraud can be committed by any employee who can claim reimbursement for expenses. Since it can be widespread, it’s especially dangerous when it’s ingrained in the culture of a company.
We’ve written the most extensive guide to preventing expense reimbursement fraud. Read on to learn how you can detect and prevent it in your organization today.
Expense reimbursement fraud can be costly. Here's how to protect your company.
A strong anti-fraud program includes controls to prevent expense reimbursement fraud, combined with a corporate culture that discourages it. This free cheat sheet provides 10 strategies you can put in place to prevent expense fraud in your organization.Get My Cheat Sheet
The ACFE describes expense reimbursement fraud as:
“A fraudulent disbursement scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expenses (e.g., employee files fraudulent expense report, claiming personal travel, nonexistent meals)”
According to the ACFE, expense fraud falls into four major 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. We describe each type more in-depth below.
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According to the 2019 – 2020 Motus Business Travel Expense Trends report, companies spend a total of $111.7 billion on business travel every year. This comes out to about 10 per cent of the company’s total annual revenue spent on travel and expenses (T&E).
That’s a large enough percentage that fraud in this area can have a significant impact on your company’s bottom line. You’re already spending a significant amount of money on T&E. When an employee adds extra, fraudulent expenses, it could mean the difference between staying in the black or going into the red.
While expense fraud can be damaging for companies of any size, it impacts small businesses more strongly than larger ones. With an estimated median loss of $33,000, according to the ACFE, expense reimbursement fraud can devastate a small company that operates on small margins.
Even more concerning is the fact that small companies with fewer than 100 employees have a higher percentage of expense fraud than larger companies. This could be caused by less sophisticated monitoring systems, weaker policies and corporate cultures, and/or simply not enough man power to effectively detect internal fraud.
With more opportunity for fraud and high losses, these schemes are among the biggest fraud risks for small companies.
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.
Detect them by training employees who review expense reports to watch for the red flags described below.
Mischaracterized expense schemes are one of the most common expense frauds. According to the City and County of San Francisco Whistleblower Program, mischaracterized expenses “occur when an employee submits a false claim to the employer,” usually by submitting “a personal expense as a business or work-related expense.”
In a 2017 survey conducted by Certify entitled The Top 10 Craziest Business Expenses, employees submitted expense reimbursement requests for a hang glider, boarding for a pet snake, and leather pants, among other things.
In that survey, approximately one in 10 respondents admitted to knowingly submitting personal items as business expenses for reimbursement.
Red flags for mischaracterized expenses include claims for:
- Items that don’t seem to have a business connection
- Meals and entertainment when employees aren’t working/travelling or on weekends or holidays
- Items or meals for children, or from
- Establishments in the employee’s neighborhood
In this type of fraud, an employee may change the amount on a receipt, or “lose” a receipt and submit a claim for a higher amount than was spent.
An employee might also collude with a merchant to get them to issue a receipt for a higher amount and split the profit (or not).
Potential indicators of overstated expenses include:
- Incomplete or inadequate expense report
- Supporting documents such as receipts that are suspicious and/or show signs of fabrication (e.g. inconsistent font, color, visible correcting fluid/tape, pixelation, scratched out information)
Detecting overstated expenses can be difficult. To uncover these schemes, take the following steps:
- 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 type of scheme that’s difficult to detect, but there are a few things that can give it away, such as:
- Multiple expense reports submitted close together from the same company, from the same employee
- Taxi, hotel, flight, or other travel-related receipts for dates and times the employee was known to NOT be on company business
- Receipt amounts that are significantly higher than similar reports submitted by other employees
- Expenses that were not pre-approved
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.
Or, an employee could submit a 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 your expenses. To detect it:
- 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.
- Be careful not to accuse the employee before you are sure it was done on purpose, as this type of scheme could occur due to employee error.
Credit return are an easy fraud scheme 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.
It’s a good idea to book all events and travel on company credit cards to maintain control of any refunds issued. However, if you can’t do that, at least stay in-the-know about employees’ flights, train trips, conference schedules, and other ticketed expenses.
For instance, set alerts for the flight through the airline, or sign up for informational emails from the conference organizer. You’ll find out first-hand if any refunds are issued and will know right away that you’re dealing with fraud, should the employee submit a claim for that expense.
Naturally, it’s a lot cheaper and easier to stop expense fraud before it happens. Putting into place some good prevention measures saves a lot of time and effort spent chasing lost money.
Here are 10 ways you can protect your company.
Have an Internal Expense Policy
The rules should be the same for everyone, regardless of department or level, 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.
In your policy, 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.
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Implement Controls at the Submission Stage
Apply these 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. Require a two-stage approval process of all expense claims to minimize errors and reduce your odds of a multi-employee scheme.
Empower Approvers to Question Employees
Encouraging investigations into expense claims shows employees that submissions are actually reviewed and checked. Deny any expenses that don’t fall within the guidelines of the company expense policy.
Implement a Secondary Control
This process should compare costs and analyze 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. This will help you 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
Scheduled and surprise audits ensures all employees follow the company policy. Bring discrepancies and minor violations to employees’ attention to warn them that their expenses are being monitored.
If warranted, launch an internal investigation into any potential expense reimbursement fraud you uncover.
Issue Corporate Credit Cards to Employees Who Travel Frequently
Ensure credit card statements are sent to the accounting department within a short time window after travel (outlined in your policy). Check 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
This ensures that everyone knows that you take 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.
Require it for everyone involved in approving expense reimbursements. Refresh training at regular intervals (e.g. annually, bi-annually) to keep the accounting department up to date on policy changes and new types of violations.
Having a plan in place can help you respond to fraud faster.
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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 saves time and increases your control over the process.
Embed Compliance Into the Company Culture
Ensure the leadership team demonstrates their commitment to the expense policy openly and with a positive attitude. 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.
Committing to a culture of ethics improves every aspect of your business, from employee well-being to asset protection.
Download our free eBook, “The 7-Step Plan to Instill an Ethical Culture, Prevent Fraud and Improve Profitability”, to learn how.Get the eBook