Expense Reimbursement Fraud: 10 ways to Protect Your Organization

(originally published at https://www.stonebridgebp.com/fraud-forensics/library/expense-reimbursement-fraud-ten-ways-protect-your-organization )

By Jim Marasco, CPA, CIA, CFE, is a partner in the Business Valuation, Forensic & Litigation Services Department at EFP Rotenberg, LLP, Certified Public Accountants and Business Consultants. He practices exclusively in the forensic and litigation support areas and travels around the U.S. helping safeguard various types of businesses.

One of the easiest ways to steal from a company is through expense reimbursements.

The Association of Certified Fraud Examiners reported in its 2012 Report to the Nations on Occupational Fraud and Abuse that approximately 14.5% of all asset misappropriations investigated involved expense reimbursement fraud.

Keeping your organization safe from pilfering employees demands strong controls, tough actions against perpetrators and management leading by example.

Whether you’re a multinational corporation employing sales representatives traveling throughout the world or a small not-for-profit organization, you can fall victim to expense reimbursement fraud.

Fraud Schemes

The two primary schemes perpetrated are employees claiming reimbursement for fictitious expenses or inflating actual business expenses.

Examples of fictitious expenses that have been known to appear on expense reports include:

Charging for items used for personal reasons (gas, groceries, hotels, etc.)

Billing for travel and expenses that never materialized (canceled airline tickets, seminar or convention registration fees, tuition reimbursement and professional dues payments)

Seeking reimbursement for items that were never purchased (office supplies, gifts for clients)

Collusion among employees who both bill separately for travel or mileage reimbursement when they traveled together

Outright falsifying or manipulating receipts

Inflating business expenses can be found when employees:

Claim meals and entertainment reimbursement that may be in excess of allowed per diems or items not reimbursable under your policy (alcohol, leisure activities, sports tickets).

Add tips to reimbursement when tips were already included.

Add tips to their reimbursement copies that were greater than what was actually left.

Fly first class or use limousines when modest means may be available and more applicable.

Use inflated mileage totals when seeking reimbursement for auto travel.

Safeguards to Prevent Fraud

Safeguarding your organization from becoming a victim to expense report fraud isn’t complicated. Start by maintaining strong internal controls.

1. Maintain a travel reimbursement policy or guidelines that govern this activity. prohibited activity and per diem amounts should be detailed in this policy and regularly communicated to your employees.

2. Require original documentation to be either submitted with the reports or maintained for a period of time for audit purposes.

3. Initiate a formal review process in which a department manager or equivalent reviews employees’ reports. Payroll or human resources should perform a cursory review as well.

4. Routinely question expenditures that look extraordinary or abnormal. Waiting for a larger problem to build will only be more difficult and costly to resolve later.

5. Have all disbursements made in a formal manner through either accounts payable or payroll. Cash shouldn’t be advanced to employees, if at all possible.

6. Implement the use of corporate charge cards for greater control. With corporate cards, companies can query each card individually and ensure that payments are being made against them.

7. Receive credit activity reports on a monthly basis from the issuing company, if using corporate charge cards. These reports can help you determ ine how many charges are being cancelled or credited back to the accounts. This activity can be compared to actual expense reports to determine if it is being accurately reported.

8. Annually audit a sample of employees’ expense reports to ensure they meet the company’s established guidelines. Be sure that proper documentation exists to support the expenditures that were requested. If a company card is used, verify that the balance is being paid promptly.

9. Treat reimbursement activities consistently by having employees pay expenditures and seek reimbursement, or by having the company pay these expenses directly. Flip-flopping between the two could allow for duplicate reimbursement to occur.

10. Prosecute offenders found to be violating or falsifying their expense reports. If they are allowed to escape unpunished, others will follow their actions.

Expense reports could represent a significant risk exposure for certain organizations. In most cases, employees are assumed to be honest and trustworthy, and their reports go unexamined.

Maintaining tight controls and frequently reviewing expense reports for compliance can alleviate dealing with larger problems down the road.

Remember also to lead by example. Employees follow the actions of their supervisors or management. The tone is set at the top. If travel and expense guidelines exist, everyone must follow them, including top management.

Jim Marasco, CPA, CIA, CFE, is a partner in the Business Valuation, Forensic & Litigation Services Department at EFP Rotenberg, LLP, Certified Public Accountants and Business Consultants. He practices exclusively in the forensic and litigation support areas and travels around the U.S. helping safeguard various types of businesses. He may be reached at 585.427.8900 or by e-mail at jmarasco AT efprotenberg.com