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Prevent Expense Reimbursement Fraud

(posted: July 9th, 2018)

Expense reimbursement fraud causes big lossesExpense reimbursement fraud accounts for 21 percent of fraud in small businesses with fewer than 100 employees, and 11 percent in large businesses with over 100 employees according to the latest report from the Association of Certified Fraud Examiners (ACFE).

The ACFE looks at this type of workplace (or "occupational") fraud, and others, in their 2018 Report to the Nations. The report identifies the various kinds of fraud found in businesses, and has sections on detection including tips and hotlines and various red flags to look for, including certain behaviors perpetrators often display. For those interested in forensic accounting, or for you statistics geeks out there, the full report can be found here.

Small Amounts Add Up Over Time

Businesses often overlook expense reimbursement fraud because the amount of money may seem trivial, but small losses can add up quickly. The median duration of expense reimbursement fraud is 24 months, and the median loss is $31,000. In comparison, the median duration of fraud schemes overall is 16 months.

Expense reimbursement fraud is one of the more common fraud schemes, though it's also fairly easy to detect. Note that traditional CPAs who do find expense reimbursement fraud in their client's (or their own) business should consider a deeper investigation as people who (think they) have gotten away with one type of theft are likely to move on to other types.

Smaller Businesses are Hit Harder by Fraud

From the ACFE's report, "(Small businesses) typically have fewer resources to both prevent and recover from a fraud, and they often require an increased level of trust in employees due to a lower ability to implement robust anti-fraud controls."

They lose more money than bigger organizations, and businesses with fewer than 100 employees tend to have fewer fraud controls, in part due to lack of resources. They are more likely to rely on workplace culture and a code of conduct to prevent fraud, and regular audits to detect it.

How Does Expense Reimbursement Fraud Happen?

Before taking a look at how to prevent expense reimbursement schemes, it's important to understand the four ways these improper claims can occur. The ACFE classifies expense reimbursement schemes in four categories:

Mischaracterized expenses. Receipts are submitted as business expenses when they are actually personal purchases.

Fictitious expenses. Bogus receipts that appear genuine. Computer programs, design skills and even legitimate companies make it easy to create fake documents.

Overstated expenses. The employee inflates the cost of a legitimate expense, such as padding mileage or showing a larger tip than was paid.

Multiple reimbursements. An employee who remits the same receipt for an item more than once, thus receiving duplicate payments.

Preventing Expense Reimbursement Fraud

One of the best ways to prevent expense reimbursement schemes is to set firm policies that make it difficult for employees to defraud their employer. Here are six ways expense reimbursement fraud can be deterred.

1.) Lead with culture. Internal controls will only go so far if the business owner makes unethical decisions. Management should model the behavior they expect from their staff, enforce anti-fraud policies, and provide a safe way for whistleblowers to report suspicious actions.

2.) Establish travel reimbursement guidelines. At its most basic, the policy should outline what expenses will not be reimbursable (such as alcohol) and per diem limits for meals and hotel rates. Most businesses reimburse employees the standard mileage rate that's set by the IRS. To mitigate mileage padding, consider asking employees to provide documented driving directions from a map website or app that correlate to the amount they are requesting.

3.) Require original receipts. Photocopied receipts are more easily manipulated than originals, so make it policy to require the original receipts. With few exceptions, the receipts should also detail the specific items purchased, the date and the business name.

4.) Double check. Even if the business has just a few employees, one of the easiest ways to prevent fraud is to require a double review before any reimbursable expenses are paid.

5.) Trust, but verify. Spot audits can help reveal anomalies and either disrupt fraud before it continues or identify expenses that lack proper documentation.

6.) Prosecute. Part of setting the tone at the top is to prosecute employees who steal. Personnel who violate policies and intentionally file false receipts should be punished accordingly. Doing so shows other workers that fraud will not be tolerated.

You've worked hard to build your business. Don't let a few bad apples destroy it. Please contact us with your questions or concerns about fraud in your company.

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