There is no limit to what some people think is appropriate to charge to the business.
The absurd business expense report is a corporate tale as old as time. It's no secret that some employees use the corporate credit card as if it's a limitless source to impress clients. However, there are (and should be) limits to company spending.
Gentlemen's clubs, basketball games, late-night poker sessions, Michelin-starred restaurants – it's amazing what some employees have tried to expense.
Common types of expense report fraud
While expense fraud is illegal, it's something most companies both large and small 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 he was supposed to be entertaining 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." [Interested in better managing your business's expenses? Choose the right business expense tracking service.]
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How to violate a $2,000 preapproved budget
Matt Schmidt, CEO of Diabetes365, used to work as a financial advisor for a large financial institution. At the beginning of his career with the company, rumors surfaced after a fellow employee was abruptly fired. As details emerged, it became very 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 ... 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 "inviting 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."
Why expense fraud matters, and what it looks like
Expensing outrageous purchases, or simply padding normal purchases, has a big impact on small businesses. The Association of Certified Fraud Examiners found that expense reimbursement makes up 14.5% of business fraud. This means businesses of all sizes need to ensure expense reports are accurate and honest. Expense report fraud comes in several different forms, including padding existing expenses or 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 when the tip is already included for a meal, going to an unnecessarily upscale restaurant or opting for limo service when public transport or a taxi would suffice. Padding existing reports means claiming an item or service costs more than it did in an expense report. Properly managing receipts and requiring a paper trail with employees can help in both these instances.
Fictitious purchases occur when an employee expenses a personal item to the company or claims to purchase something they never actually purchased. This commonly occurs when employees modify or falsify receipts when filing their expense reports.
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.
1. Define expense report policies.
Clearly defining and implementing a policy is the best first step toward managing expense report fraud. Vague language in employee handbooks, or rules and regulations established to meet tax or audit guidelines as opposed to company ethics guidelines, provide ample opportunity for both confusion and malice.
Defining your policy is half the battle; implementing it can be a big challenge. As with most business policies, the key is holding managers accountable. If your managers aren't going to work within a reasonable business expense policy, it's unlikely your other employees will, too.
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 the employee personally knows the individual who approves their expenses, they may think twice about taking advantage of their manager, as opposed to an anonymous corporation. To make the process even more comprehensive, consider adding project-specific approvers based on what the expenses are specifically for.
3. 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. A hefty meal could come out of their own pocket or, worse, cost the individual 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 they submit a fringe report.
4. Monitor and track expense report data.
Tracking and monitoring expense data helps your business identify disruptions in an employee's expense patterns. It could be an extra bottle of water, or it could be an outlandish rental car upgrade. By keeping individualized sets of data for each employee, you can identify and mediate problems instantly. These graphs and reports can also be useful when it comes to budgeting for future expenses.
Protecting your business against expense report fraud comes down to managing employee expectations and staying vigilant about employee spending.
Matt D'Angelo also contributed to the reporting and writing in this article.