Expense report fraud is a problem most accountants know exists, but aren't quite sure how much of a problem it really is. Knowing how to identify this type of fraud is the first step.
Honest expensing mistakes and unintended policy violations happen all the time, which is one big reason this type of fraud is a difficult area to quantify. For example, overestimating for mileage reimbursement is an especially common reporting error. But sometimes it's fraud.
Expense management by its very nature can be complex and unpredictable, too, especially for companies using a manual system. Add in manual policy review and sample-based auditing processes and you're left with a lot of loopholes that can put companies at even greater risk. And the risk is significant; an estimated $1 billion will be lost in 2015 due to expense report fraud, according to J.P. Morgan.
So, while distinguishing human error from deliberate fraud isn't easy, there are steps to be taken to avoid this type of fraud. Understanding the scope of the problem and how to recognize expense report fraud can help keep your clients' assets out of the hands of would-be perpetrators.
Four Types of Expense Fraud
Thanks to the Association of Certified Fraud Examiners (ACFE), we know there are four broadly defined categories of expense fraud:
- Mischaracterized expensesâEmployee requests reimbursement for a personal expense but claims it to be business-related.
- Overstated expensesâReimbursement requested for a legitimate business expense, but a trumped-up amount.
- Fictitious expensesâEmployee seeks reimbursement for fake purchases often âbacked upâ with fake receipts.
- Multiple reimbursementsâWhen an employee submits the same expenses and receipts on multiple reports.
These definitions are helpful in understanding common reimbursement schemes, but there's really no limit to how deceitful employees might try to evade company controls or take advantage of system weaknesses. A bit of good news, though: a 2014 Oversight Systems report found just 5 percent of employees commit 82 percent of all expense report fraud.
The Hidden Costs of T&E Fraud
While expense fraud may be difficult to detect, its negative effects are quite plain to see. Also, while fraud can be devastating for companies of every size, small businesses on average pay a far greater cost. Again, according to the ACFE, the estimated median loss of expense fraud is more than $30,000. And small companies with fewer than 100 employees have a 28 percent higher median loss than those with 100 or more employees.
Why? It's easy to assume larger businesses have more spending controls, maybe an automated system for monitoring policy compliance or a full-time accountant dedicated to reviewing and auditing reports. Whatever approach a company takes to travel and expense (T&E) management, these numbers make it clear there's no fool-proof solution to completely eliminating expense report fraud.
Protect Your Client's Assets
Expense report fraudsters typically know how to work the system to exploit reporting weaknesses. Some of these system soft spots are easy to identify, like a lack of administrator visibility or manual compliance review. Still, accounting professionals play a critical line of defense and there are steps you can take now to detect and deter fraudulent expense reporting.
The simplest thing to do is to have a written T&E policy. According to Oversight Systems, 6.3 percent of all expense transactions are considered to be out of compliance. So, it's surprising to hear when a company is working with a policy that hasn't been reviewed or revised in years, or has no written policy at all.
When policy rules are worked out and written down, it's easier for employees to understand exactly what constitutes a violation. It's also easier for administrators to eliminate gray areas to understand which employees are playing by the rules and which aren't.
Policy is also the place to define expense categories. Consider this statistic from the Certify Annual Expense Management Outlook 2015: âMiscellaneousâ is the fifth largest expense category representing 8 percent of total T&E spend. That's more than cellphones, taxis, and six other clearly defined categories. Consider also that miscellaneous spending often includes more cash transactions and it's easy to see the risks associated with a lack of formal T&E guidelines.
Another step to deterring T&E fraud is adopting an automated expense reporting system. Today's T&E management software can integrate policy controls, credit cards, travel bookings with pre-trip approval, compliance monitoring tools, and more. Advanced reporting, documented approval workflows, and an electronic auditing process also make it much harder for fraudulent expenses to go undetected.
The Bottom Line
As I mentioned, fraud happens and it can happen no matter what accountants put in place to stop it. But understanding exposure and incorporating best practices in T&E expense management will reduce risk and give greater transparency to the reimbursement process, as well as company codes of conduct.
About the author:
Robert Neveu is the CEO of Certify, an online travel and expense management tool maker for companies of all sizes. Before starting Certify in 2007, he formed Recruiternet, an applicant tracking software company that he sold to First Advantage in 2005.