Expense reimbursement fraud schemes are among the most common types of fraud, accounting for 14% of all asset misappropriation fraud schemes, according to the 2016 Report to the Nations on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners (ACFE).
The organizations that suffer most from expense reimbursement fraud are businesses with fewer than 100 employees, and cases range from a few dollars for non-work-related meals to hundreds of thousands in a systematic scheme over several years—not surprising given the limited fraud-prevention budgets available to small and midsize entities (SMEs). About 51.5% of large corporations have a dedicated fraud department, while only 15.7% of small businesses have them, according to the ACFE.
CASE STUDY: EXPENSE FRAUD AT FOODCO
I have witnessed many cases of expense reimbursement fraud in the course of my career, and the one that really stood out was an incident at a food company.
The company's client base had increased rapidly, and over a wide area, to the extent that the sales director and his team were constantly on the road.
New sales employees were hired regularly to keep up with the increasing number of clients.
No specific travel and expenses policy was in place. But the unwritten rule was to use common sense. Any employee who needed to claim business expenses had to fill out a paper form and submit receipts for each purchase. The report had to be authorized and signed by the employee's line manager before being submitted to the accountant. The accountant had to check whether the report was signed, that the expenses were reasonable, and that the receipts for each expense were attached to the report.
One evening, one of the new junior salesmen was about to leave the office. His manager asked him to drop off an expense report for the past month with the accountant. As the junior salesman glanced through the document, he noticed something puzzling: The sales manager had made a mileage claim for a business trip that happened two months before.
The junior salesman remembered that day clearly; it was his first visit to a client, and he and the sales manager went to the client's office by train.
The junior salesman pointed this out to the accountant when he submitted the report, thinking that there had been an innocent mix-up in the dates.
The accountant checked the past six months' records and discovered that this was a regular practice by the sales manager: The sales manager would submit receipts for train tickets purchased to visit a client. Then, after one or two months, he would claim mileage for that same trip. She found something else: The meals he supposedly had with clients on weekdays actually happened on weekends, as evidenced by the dates of the original receipts.
This discovery was taken to the managing director, and he asked for a full report on expense claims made by the sales manager over the years. The report submitted by the accountant showed that the sales manager had claimed almost $16,000 in the past three years for personal weekend meals and mileage claims on trips that had already been reimbursed.
The accused sales manager initially denied any wrongdoing, saying that he must have mixed up a few dates and he needed to check his records. When he saw how much incriminating evidence there was against him, however, he couldn't deny the accusations. He finally admitted that he had inflated expense reimbursements by submitting claims more than once for the same trip and that most of the client meals were his personal expenses.
He had been able to get away with it for so long because he realized that neither the sales director nor the accountant ever checked the dates on the receipts or compared claims with past records to check for duplicate expenses.
The sales director admitted that due to frequent travel and his extremely high workload, he barely had time to do a reasonableness check of the expense claims. He was confident that this check was enough to spot fraudulent expense claims.
After the formal internal investigation was completed, the sales manager was dismissed from his job and asked to pay back the stolen money.
HOW CAN SMEs PROTECT THEMSELVES?
The incident prompted the managing director to seek my advice on how to prevent this kind of incident from happening again. All SMEs can use these methods to prevent or detect fraud in these areas:
- Travel and expenses policy. Implement a formal written policy and training on these new rules and deliver it to employees. Distribute a written copy of the policy to all existing employees and include it in the welcome pack for new hires. The policy should include a section on how to handle instances of noncompliance with the policy and punitive measures to be taken in cases of fraud.
- Meaningful approvals. In the case study, the sales director didn't carry out an accurate review of the sales manager's expenses because he trusted him. This was what gave the sales manager the confidence to perpetrate the fraud comfortably. Trust is essential but should not be a reason to disregard control measures, especially when it comes to fraud prevention. Furthermore, for approvals to be an effective anti-fraud control, approvers need to be aware of which details they have to check and why. After the case came to light, approvers at the food company were given guidelines on how proper, meaningful approvals should be carried out.
- Cost monitoring. Implement two controls at different stages of the expense reimbursement process. At the food company, the first control had to be carried out when the paper expense claim and the receipts were submitted to the accountant. The documents submitted had to be checked to spot any questionable expenses. In addition, at the end of every month, the accountant had to analyze the average amount spent by employee or by type of cost (e.g., meals, fares, and mileage) to spot any unusual trends.
Consider investing in an expenses management software program rather than handling expense reviews manually. An automated process enhances control over the expenses process. This tool can also manage the approval steps required to validate the claim, store copies of the supporting documentation, and prepare customized cost analyses.
- Lead by example. Enforce the policies strictly—even when the sums involved are small—if you are serious about preventing fraud. This will prevent the spread of a noncompliance culture and of significant financial losses.
The original version of this article, "How to Stop Expense Reimbursement Fraud," by Cecilia Locati, ACMA, CGMA (email@example.com), director of Fraud Fence, a consultancy that advises companies on internal fraud prevention, is available at cgma.org.
CGMA Magazine is published in conjunction with the Chartered Global Management Accountant designation, which was created through a partnership between the AICPA and CIMA. The magazine offers news and feature articles focused on elevating and emphasizing management accounting issues.