How to identify and prevent expense fraud

There are millions of businesses operating throughout the world, and every one of them, in some way, is vulnerable to employee fraud. The minority who do can cause a lot of damage to company financials, especially when it comes to smaller businesses. 

Expense fraud explained

Expense fraud ranks among the most commonly occurring types of employee fraud. With an estimated 5% of revenues typically lost to fraud around the world, expense fraud alone accounts for 14.5% of all fraud uncovered. There will always be employees seeking to benefit at the expense of their employer for one reason or another, but while every inaccurate expense claim hurts your business, not all of them are done intentionally. Inflated or unverifiable amounts can sometimes be put down to a simple typing error, or a legitimate claim where an employee lost their receipt. For these reasons, it’s essential to ensure your expense process is simple and clear so as to avoid as much human error as possible, as well as assessing and investigating inaccurate claims thoroughly before confronting employees.

What is expense fraud?

Expense fraud refers to a deliberate, devised attempt at inflating reimbursements. It occurs when an employee knowingly completes inaccurate expense claims. Over-claiming for restaurant tips, submitting too much for allowed amounts, and turning in receipts for unused items or trips are some of the most common expense offenses. They might, for example, charge your company for an expensive dinner with friends, claiming this as a “business dinner”,  or expense hotel costs for a business trip they later turn into leisure.  

Other common reimbursement fraud schemes can include employees submitting:

• Bills for trips that were never taken, such as canceled airline tickets or hotel registration refunds
• Claims for items they didn’t purchase, such as office supplies
• Separate auto mileage bills from employees who actually traveled together
• Inflated mileage totals
• Bills for non-reimbursable expenses, such as alcohol or leisure activity tickets

Some employees are habitual cheaters who stock up on blank receipts from cab companies and restaurants to submit with phony expense reports.

It’s important to note that expense fraud is, quite often, carried out by those people who are inherently honest and don’t intend to defraud their employer of huge amounts of money. More commonly, employees are committing small acts they don’t associate with fraud because it’s possible and they don’t think anyone will notice. In many cases, mistakes arise because of genuine human error or employees not being aware of or understanding the expense policy 

There are a limited number of cases where there are genuine ‘bad actors’ when it comes to cases of expense fraud, but it’s still an issue that needs to be monitored. Large or small, expense reimbursement fraud really does cut into a company’s bottom line, driving up the cost of doing business in the process. 

How big a problem is expense fraud in most companies?

A 2018 study done by the Association of Certified Fraud Examiners concluded that expense reimbursement fraud accounts for 21% of fraud in small businesses (those with less than 100 employees), and 11% in large businesses (those with 100 or more employees). Businesses often overlook expense fraud because the sums of money involved can seem trivial, but, the costs can quickly add up. 

Fraudulent employees tend to spread expense reimbursement scenes out over long periods of time, with the median duration of expense claim fraud being 24 months, and the median loss $31,000. If you come across expense fraud, it’s important to be aware that it can also be a sign a larger problem. Where employees are willing to carry out one scheme, they may be willing to carry out others. In these types of expense fraud cases, company losses can range from a few hundred dollars of padded receipts to millions in schemes spanning  several years.

Why do people commit expense fraud? 

Is there a specific driving force behind expense reimbursement fraud that explains why it’s more likely to happen in some organisations than others? Companies often wonder what the motivation is behind their employees choosing to take such a big risk for seemingly so little reward, however reasons vary from individual to individual and company to company. 

Many people justify expense fraud with one of the following arguments:

• The company owes them. 57% of employees surveyed in the UK claimed that they were out-of-pocket due to work-related expenses. Because reimbursement happens slower than they may wish, they felt entitled to ‘surcharge interest’ on the debt.
• They’ve earned the right to do it because they put in a lot of overtime or have spent time away from their family and therefore deserve a treat.  39% of people in a 2017 survey agreed that if they’re traveling for work, they deserve a little treat at their company’s expense. 
• Their colleagues are getting away with claiming false expenses, so why shouldn’t they also take advantage?
• They’re not happy with their remunerations and see an opportunity for a self-service pay rise.

With today’s workplace experience vastly altered from that of previous generations, a culture of freebies and perks has become part of the mindset of some, and this can at times translate into a ‘not doing something for nothing’ mentality. For some, the line between right and wrong in this regard has become so blurred that the distinction between acceptable and unacceptable expense fiddling is no longer objective. 

The rising cost of living may also embolden some employees who have only taken a chance with minor amounts historically. And during times of economic downturn, the uncertainty of the period may tempt employees who have never committed expense fraud to supplement their incomes in a relatively easy way.

What are the types of expense fraud?

The Association of Certified Fraud Examiners has set out  four types of expense fraud:

• Mischaracterized expenses: The employee submits personal expenses under the category of business expenses. These claims tend to be common, as there is usually no way of categorizing such a claim by only looking at the submitted receipt. 86% of global office workers said that they have never had any of their expense claims challenged or declined. 
• Fictitious expenses: The employee submits fake receipts that appear genuine. Computer programs, design skills and even legitimate companies have all made it easier to create fake documents.
• Overstated expenses:  The employee inflates the cost of a legitimate expense. This can either be done by padding mileage or showing a larger tip than what was actually paid. 
• Multiple reimbursements - An employee remits the same receipt for an item more than once. The finance team then ends up approving duplicate payments, if they’re not careful about accepting expense claims. 

While minor expense fraud is unlikely to have a material impact on the financial position of the company, it could become a prevalent behavior across the organization if allowed to continue and there is also a risk of escalation to larger-scale fraud.

How to identify and prevent expense fraud

Safeguarding your organization from becoming a victim to expense report fraud doesn’t have to be complicated, however there’s no quick solution. It’s important to start by maintaining strong internal controls—there are a few key steps finance teams can take into consideration to help cut down instances and minimise impact when it comes to balancing the books.

1. Start with policy 

Set a clear and fair expense policy—one that’s free of ambiguity, but still shows understanding, particularly for frequent travelers. A well-written policy and an expense management system that flags irregularities can help limit expense fraud. 

Your policy should be regularly communicated to your employees, and provide detailed info on prohibited activities and per diem amounts.  Employees will think twice if the rules and the consequences are clear, and finance teams can investigate out-of-policy claims quickly and efficiently. 

2. Give your employees the right tools

A third of business travelers are still turning in paper receipts to claim expenses, despite the fact that employees who use hard copies have been found twice as likely to commit fraud. Putting systems and tools in place can simplify the process, making it easier for employees to claim the right amount, and for policy to be followed. 

3. Change how you do expenses

Implement the use of corporate charge cards for greater control. With corporate cards, companies can query each card individually and get better oversight over spending. You’ll also be able to receive credit activity reports on a monthly basis from the issuing company. 

4. Audit selectively. 

A good practice is to try auditing the first ten expense claims of all new hires, to make sure they understand and are complying with your expense policy. You can then continue monitoring by auditing every tenth claim submitted, for example. Remember to look at backdated claims too, so that you can correlate receipts with specific events or trips.

5. Bring in HR support

Expense fraud can come from learned behaviour, so make sure managers—and their managers—are receiving advice and information on the appropriate penalties that help to deter future fraud.

In most cases, employees are assumed to be honest and trustworthy, however, maintaining tight controls and frequently reviewing expense reports for compliance can prevent larger problems down the road. It’s important to lead by example, as employees tend to follow the actions of their supervisors or management. The behavioural standard is set at the top; where travel and expense guidelines exist, everyone must follow them.

Keep allowance rates up to date 

One of the best ways to avoid employees submitting forms for additional expenses, that are not in line with your policy is to keep your rates fair, and up-to-date. Consider the age of your expense rates, cities with growing tech centers have become more expensive in the last 5 years, perhaps it is time to revisit your policy. Or consider the regional variance in the cost of living: a meal in Paris is likely to cost more than a meal in Glasgow. Our guide on HMRC subsistence rates will provide some reference on what is deemed a fair and tax-free amount, depending on the city.