Expense reimbursement management is one of the least examined processes of an organization. Ensuring a sound travel expense reimbursement policy has the potential for saving an organization millions of dollars by preventing non-sanctioned travel spending before it happens, rather than addressing it after the fact. Data proves that the typical employee spend on business travel amounts to a significant chunk of a company’s expenditure.

In the field of expense reimbursements, today’s companies face a heightened risk of financial loss. It is imperative that they build a solid framework of guidelines and policies that make the reimbursement process transparent, irrefutable and impossible to defraud.

The process

An employee submits a report detailing a business expense such as lunch with a client, flight expenses or lodging bills. The report usually contains an employee’s explanation of the purpose for the expense, as well as the time, date, and the location where it was incurred. A receipt or other expense documentation is typically attached to the report. The report usually must be authorized by a supervisor in order for the expense to be reimbursed. Employees can manipulate an organization’s expense reimbursement procedures to generate fraudulent disbursements. Non-compliant fraudulent behavior by employees, also known as expense reimbursement schemes within the fraud fighting community, can be grouped into four major categories,

Mischaracterized

Most companies only reimburse certain employee expenses. Though some reimbursement policies and guidelines are more extensive than others, these expenses generally include business related travel, lodging and meals. One of the most basic expense reimbursement schemes is claiming personal expenses as business expenses. Examples of mischaracterized expenses include claiming personal travel as a business trip, listing dinner with a friend as “business development” and so on. Employees submit the receipts from their personal expenses along with their expense reports, but concoct business reasons for the incurred costs. The false expense report induces the victim organization to reimburse the perpetrator for their personal expenses.

Overstated

Instead of seeking reimbursement for personal expenses, some employees overstate the cost of actual business expenses. This can often be accomplished through different means.

Altered receipts

The most common example of an overstated expense reimbursement scheme occurs when an employee doctors a receipt to reflect a higher cost than what they actually paid. The employee might use correction fluid, a ballpoint pen or some other method to change the price reflected on the receipt before submitting their expense report. If the company does not require the submission of the original documents as support, the perpetrator can attach a copy of the receipt to their expense report. Alterations are usually less noticeable on a photocopy than on a physical document. Businesses should require original receipts and ink signatures on expense reports for this reason.

As with other expense frauds, overstated expense reimbursement schemes often succeed because of poor controls. In companies where the supporting documents are not required for expenses under a certain threshold, fraudsters simply lie about how much they paid for the business expense. With no support available, it can be difficult to disprove an employee’s false expense claims.

“With no support available, it can be difficult to disprove an employee’s false expense claims.”

Over purchasing

Another way to overstate a reimbursement form is through over purchasing business expenses. This method is typically used by employees seeking reimbursement for travel expenses.

Assume an employee is scheduled to make a business trip to another city. The employee purchases an airline ticket in advance of the trip at a low rate. When it is close to the day of the trip, the employee purchases a separate, more expensive ticket to the same destination. To further increase the price, the second ticket might include several stops on a very circuitous route. The employee removes the passenger receipt coupon from the second receipt and then returns it for a full refund. They actually fly on the first, less expensive ticket, but attach the receipt for the more expensive ticket to their expense report.

Fictitious

Employees sometimes seek reimbursement for wholly fictitious expenses. Instead of overstating a real business expense or seeking reimbursement for a personal expense, an employee invents an expense and requests reimbursement.

Producing fictitious receipts

One way to generate a fictitious expense is to create bogus support documents, such as false receipts. Using simple computer software, it is easy for employees to create realistic-looking counterfeit receipts at home. These counterfeits can be sophisticated, including the logos of stores where the goods or services were allegedly purchased. A few unscrupulous websites such as www.customrecipt.com offer multiple ways of creating fictitious receipts. Computers are not the only means of creating support for a fictitious expense, as some employees can cut and paste old receipts from suppliers.

Obtaining blank receipts from vendors

Receipts can be obtained from legitimate suppliers in a number of ways. Some employees request blank receipts from waiters, cab drivers, bartenders or other vendors. These individuals fill in the blank receipts to create false business expenses. The fraudster might also have friends, relatives or a spouse who helps them procure receipts for fake business expenses that never occurred. In some cases, a fraudster can steal an entire stack of blank receipts from a restaurant or hotel and then fill them in to use for fictitious business expense over time.

Claiming the expenses of others

Another way perpetrators use actual receipts to generate unwarranted reimbursements is by submitting reports for expenses that were paid by others. For instance, an employee might save the receipt from a meal that was paid for by another party, and then request reimbursement for the meal himself.

Multiple / duplicate

A common way of committing expense reimbursement schemes involves multiple reimbursements. This type of fraud involves the submission of a single expense more than once. The most frequent example in this scheme is the submission of several types of supporting documents or bills for a single expense, then repeatedly claiming this expense at different points in time. This occurs mainly in systems where there is no proper framework on the latency time period for submitting expenses.

In cases where a company does not require original documents as support, some employees even use several copies of the same supporting document to generate multiple reimbursements. The victim organization therefore ends up paying multiple times for the same expense.

Fraud detection

Review and analysis of expense accounts

Generally, expense account review uses one of two methods: Historical comparisons or comparisons with prior budgeted or allocated amounts for each project or department. A historical comparison examines the amounts expended during one period in relation to the amounts spent in previous similar periods. Budgets are estimates for the money and/or time necessary to complete a task, based on past experience with consideration for current and future business conditions. When comparing actual and budgeted expenses, determining accurate budget estimates is important.

Detailed review of expense documents

Overall, the best detection method is a detailed review of employee expense reports. This method requires that the auditor has a copy of an employee’s schedule for the relevant period being examined. The auditor should be familiar with the company’s travel and expense policies. Additionally, two steps help detect and deter employee expense abuses.

  • Require employees to submit their expense reports for a detailed review before payment is reimbursed. If an employee knows that the expense report will be thoroughly examined, they will be less likely to include fraudulent expenses in the report.
  • Periodically audit employee expense submissions. This is particularly effective shortly before the performance review cycle each year.

Fraud Prevention

Detailed expense documents: submission and review

Detailed expense reports should require the following information:

  • Receipts or other supporting documentation
  • Business purpose
  • Time and date of the expense
  • Place of expenditure
  • Amount of expenditure

When possible, require that the employees submit original, paper receipts. Paper receipts are typically more difficult to tamper and forge as compared to electronic, scanned images for review. A policy requiring the periodic review of expense reports, coupled with examining the appropriate details, will deter employees from submitting personal expenses for reimbursement.

Elude the fraudsters

How often do people cheat on their expense reports? 83% of those recently polled in an industry survey said they are always honest due to the visibility of electronic reporting in their respective organizations. 10% claimed they pad expense reports by $100 or more. The reasons cited for cheating included employees feeling that traveling for business is an inconvenience for which they should receive additional compensation. Others stated they were sure there were other expenses they forgot to enter on a prior expense report. These are interesting suggestions but such submissions are still clearly fraudulent.

Items to consider:

  • Require one expense report per trip so expenses are easier to track
  • Issue corporate credit cards to frequent travelers. This reduces the risk of the firm never receiving credit for cancelled flights, as well as other types of potentially fraudulent transactions
  • Do not allow future-dated travel that is not charged to a corporate charge card
  • Establish a meal policy requiring the highest-ranking individual to pick up the tab

Documenting the approval process clearly

Approval routes can be built based on hierarchy (e.g., manager, director, VP, etc.), dollar threshold escalation and additional criteria. Typical approval routing should have between two to four levels of approval. Too few approval levels leaves firms unable to adequately review expenses. Too many, and it becomes too complex to execute and maintain. Most companies prefer accounts payable staff to serve as the final step in the approval process before the approved claim is exported to the financial system for payment.

Fraud analytics

The benefits of utilizing analytics for identifying noncompliance and fraud in expense reimbursement claims can be useful. Predictive and forecasting analysis based on historical data, 24-hour analysis to find out the most common hour of the day when higher instances of fraud occur or setting up a rules engine for flagging transactions prone to noncompliance for audit can provide beneficial results.

Predictive and forecasting analysis

Deep diving into the historical data can throw light on significant patterns and trends to forecast future instances of noncompliance and fraud.

Rules engine

An in-house rules engine can assign risk scores to each transaction based on certain risk factors. Transactions with higher risk scores can be prioritized for auditor review. Considering the fact that some organizations audit and review the expense claim transactions after the payment is disbursed, this method can be critical for identifying fraud.

Automation

Automated processes can immediately flag noncompliant employee expenses. Depending on the type of noncompliance, the employee may be asked to provide an explanation. Approvers determine the outcome or may remove the item from the expense report altogether. If personal items are charged to a company-paid corporate card, the expense owners can mark the item as personal, automatically deducting the cost from the employee’s out-of-pocket reimbursement.

Once an automated expense management solution is implemented, further leverage can be gained by using analytics and business intelligence reporting. This can lead to operational improvements, such as:

  • Analyzing spend by expense category to uncover opportunities for ‘strategic sourcing.’ Evaluating certain types of expenses such as hotels or car rentals may reveal that an organization could benefit by developing a preferred relationship with one or more key suppliers. By knowing and committing to the probable volume of expenses with a provider, studies show organizations can realize significant savings that often exceed 20% of their total spend.
  • Reviewing and auditing 100% of expense claims is an unhealthy practice. The labor spent on this exercise can be better utilized, and it is not always certain reviewing every single claim can find more noncompliant instances. This is where analytics plays a key role in identifying the perfect sample for review.

The final word

Expense reimbursement is difficult and often not made a priority. This may be justified in smaller organizations where business travel and reimbursements are minimal, but larger organizations must invest and adopt sound reimbursement policies and practices. Studies and analysis have shown that on average, 5% of all expense reimbursement transactions claimed are fraudulent and non-compliant across every industry. For this reason, companies must incorporate a strong strategy, transparent policies and a resilient analytical framework to combat fraud and ensure significant financial savings.

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