How to Prevent Employee Expense Fraud

Mar 8th 2019
CPA, CFE Powerful Accounting LLC
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employee fraud

On the fifth episode of my “Fraudcast” series, Stephen King and I unpacked employee expense fraud. For those who are unfamiliar, Steve is a CPA for the Client Accounting Services firm GrowthForce and the author of The CEO’s Guide to Reducing Fraud, which has served as a continuous reference during the podcasts.

To start the conversation, Steve went over the four types of expense reimbursement fraud. These include personal expenses submitted to the company for repayment, overstated expenses (where somebody might round up or add a number), fake bills for nonexistent expenses and the same expense submitted multiple times.

Employee expense fraud is unlike other types due to its emotional nature. As a small business owner, it’s hard to imagine a team member stealing money from you, and it’s devastating for trust to be broken.

Do most people set out to steal? I would say no. In fact, 90 percent of fraud cases are committed by first-time offenders. However, 76 percent of those were reported by people in accounting, sales and operations, or management. The CEO’s Guide offers common scenarios for employee expense fraud on page 23. You can also check out Steve’s webinar that covers the subject and share it with clients.

One preventative measure, and we’ve mentioned it before, is to separate work duties. If a single person oversees multiple professional areas, the opportunity for fraud is not only wide open, but can be tempting for even the best employees amid financial stress.

However, separating duties by separating people is costly and not attainable for some small businesses. On page 30 of The CEO’s Guide, Steve lists ways to implement internal controsl without adding employees to your team. For instance, you can utilize technology to create task division and hold workers accountable. Receipt Bank and are possible resources, both of which require a scanned image of expenses to ensure legitimacy. 

Another piece of advice is to make sure there’s a receipt for everything. Have a written policy where expenses need to be documented.

Further, Steve suggested rotating employee responsibilities to curb fraudulent activity. He had a client, for instance, who stole payroll taxes by making printed checks payable to themselves and changing the recipient to the IRS in QuickBooks. At a glance, the money being spent thus appeared normal to the CEO, and he didn’t know about the scam until the IRS showed up at his door.

Every single transaction in QuickBooks goes into an audit trail, even if a prior transaction is edited or deleted. If somebody changes the payee on a check, you’ll see it in the audit trail report. A CPA or CAS practice should be looking at that periodically, because changing the recipient is a red flag.

I closed the podcast by asking Steve about the most effective steps to minimize risk of employee expense fraud. He suggested separating each transaction into three different parts, emphasizing that in any scenario, the person who enters the bills must be different than the one who approves the bills. Furthermore, neither of those people should control the bank records. This is pivotal.

Additionally, he reiterated the significance of receipts. Keep track of where money is going, and have it in writing. Back. Up. Expenditures. It could save you in the event of an audit.

Thanks for engaging with Steve and me, and thanks for uniting with us in the fight against fraud. Our next segment will visit the ins and outs of billing schemes. You’ll want to tune in for that. In the meantime, you can always listen to past episodes if you’re itching for a fraud fix.

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