Expense reporting can be arduous due to the amount of time it takes to sort through tons of documents and validate their legitimacy. However, it can be even more complicated when employees make fraudulent reports or inflate costs on items they purchased to swindle money from the company.
Employees may falsify documents, report receipts more than once and use other sneaky tactics. It's essential for businesses to understand how to avoid expense fraud and identify fraudulent activity.
How to avoid expense fraud
Expense report fraud may seem like an obvious problem to combat. Why not just hold employees accountable when they overstep their boundaries? In larger companies, this may be easier said than done. However, even small companies can struggle to hold people accountable and enforce a reasonable, legitimate expense report policy.
Here are some commonsense measures every business should implement to prevent expense fraud.
1. Define and implement expense report policies.
Clearly defining and implementing a business credit card expense policy is the best first step toward preventing expense report fraud. Vague language in employee handbooks, or rules and regulations established to meet tax or audit guidelines instead of company ethics guidelines, provide ample opportunity for confusion and malice.
Defining your policy is only half the battle; implementing it can be a big challenge. As with most business policies, the key is holding managers accountable.
2. Implement an expense review and approval process.
A thorough review and approval process for expense reports reminds employees that their expenses will be scrutinized and that they are accountable to others. When an employee personally knows the individual who approves their expenses, they may think twice about taking advantage of their manager instead of an anonymous corporation.
To make the process even more comprehensive, consider adding project-specific approvers based on expense categories.
3. Automate the review process.
Automating the expense review process will save time and money, and your system will also become easier and safer. Companies with an expense management system won't have to worry about human error when sifting through expense reports, because employees can upload pictures of their receipts.
Another benefit to automation is that the system can track expenses in real time, flagging violations at the moment they occur.
4. Thwart policy violations before employees submit reports.
Before every project or business trip, remind employees of the company's expense policies. Reinforce (in writing) what happens when someone recklessly spends the company's money. An expensive meal could come out of their own pocket or even cost someone their job.
Also, consider implementing a system that highlights expense report violations as they're being entered. This gives the employee one last warning and an opportunity to correct the problem before submitting a fraudulent report.
5. Monitor and track expense report data.
Tracking and monitoring expense data helps your business identify employee expense pattern disruptions. It could be an extra water bottle or an outlandish rental car upgrade. By keeping individualized data sets for each employee, you can identify and mediate problems instantly. These graphs and reports can also be helpful when it comes to budget planning for future expenses.
It may be beneficial to request that employees submit original itemized receipts to confirm they are legit and to avoid expense fraud. The receipts should include items purchased, the date and the name of the business.
How to look for the different types of expense fraud
You may not be able to prevent every instance of expense fraud, but there are ways to uncover red flags as you go through expense documentation.
Employees may submit fake documents, such as receipts and checks, that look real but are not legitimate. There are computer programs and companies that can make these documents look valid.
You can identify fake expenses by examining specific details on the reports. If your company has a preferred vendor, look for vendor-specific details such as the tax ID and location. These details can highlight any contradictions in reported info or even prove the vendor info has been falsified.
Sometimes you may find an employee submitting a personal expense as a business expense. Be aware of locations and times on the reports to verify if those claims were business related or personal. If they weren't on a business trip when they incurred the expense, it could be expense fraud.
Multiple reimbursements happen when an employee submits the same receipt on more than one report, resulting in additional reimbursements to that employee for the same items. This type of expense fraud can be difficult to spot if the company doesn't track the history of receipts or employee reports.
T&E (travel and expense) software is a smart investment for companies to keep track of reports, compare companywide expense data and track the history of everything submitted.
Employees may decide to inflate the costs on their receipts to make it seem as though they paid way more than the items actually cost. Another method of overstating expenses is over-purchasing items and then returning and getting a refund for some of them after receiving their expense reimbursement from work.
One way to avoid this type of fraud is to research the costs of typical travel expenses in the city where the employees are going for their business trip. You'll have an estimate of what they should be spending while there.
Why expense fraud matters, and what it looks like
Expensing outrageous purchases, or simply padding standard purchases, has a significant impact on small businesses. A 2021 report by Oversight found that despite travel and expense spending having decreased by about 55%, spending violations have increased 292%. This means all businesses must ensure expense reports are accurate and honest.
Expense report fraud comes in several forms, such as padding legitimate expenses and expensing fictitious purchases.
Padding existing reports
Padding expense reports involves either adding costs to an existing purchase or unnecessarily opting for more expensive products or services. This includes adding a tip for a meal when the tip is already included, going to an unnecessarily upscale restaurant or opting for limo service when a taxi would suffice. Padding existing reports means claiming an item or service costs more than it did in an expense report.
Fictitious purchases are when an employee expenses a personal item to the company or claims to purchase something they never actually purchased. A common example is employees modifying or falsifying receipts when filing their expense reports.
Outrageous expense report fraud examples
While expense fraud is illegal, it's something both large and small businesses contend with. These cringeworthy examples of expense report fraud illustrate just how far some employees will go if proper procedures are not in place.
A spontaneous rainforest journey
Patricia Campbell, human resources director for Pro Bono Legal Advice, once had an employee leave the city where they were supposed to entertain clients.
"I once had an employee submit a $3,000 expense for taking a private limousine to a petrified rainforest three hours away from the city where he was supposed to be entertaining clients," she said. "Obviously, this employee was terminated upon submission of this expense report. Overpadding an expense report is akin to embezzlement … It is unlawful."
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How to violate a $2,000 preapproved budget
Matt Schmidt, founder of Diabetes365, used to work as a financial advisor for a large institution. At the beginning of his tenure with the company, rumors surfaced after a fellow employee was abruptly fired. As details emerged, it became clear to Schmidt and others what had happened.
"He used the company corporate card to host a happy-hour event for clients and prospects," Schmidt said. "All of this was preapproved ahead of time, including, I believe, a limit of up to $2,000. [But] my co-worker hosted an event at a gentlemen's club, and when [the financial institution] got the statement, he got shown the door."
Daniel Herrmann, co-founder of Germany-based Monokel Consulting, used to work for a boutique energy consultancy. Three partners were vying for the CEO position, and one candidate "went wild with expenses." He started staying at luxury hotels and "invited clients and prospects to restaurants, which were rated with Michelin stars," Herrmann said. "Like all the places you ever wanted to go but would never go within reason. Expenses included bottles of wine for several hundred bucks. Also turned out some of the clients or leads didn't even work in the energy industry – probably just some of his friends."
Matt D'Angelo contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.