The sneaky danger of expense account fraud
Compared with other occupational fraud schemes, expense account cheating may seem like small change. However, it’s possible for your clients to be nickel-and-dimed out of business by employees who lie about their businesses expenses. You can help clients prevent losses by urging them to learn the facts about this insidious workplace crime.
Just one example
How damaging is expense account fraud? Recently, a company planning to go public hired a CPA firm to audit its books and search for any “skeletons in the closet.” The experts discovered a $2.1 million expense account fraud scheme perpetrated by three of the company’s executives. The executives had been stealing from their employer for two years, submitting virtually all of their own and their families’ bills as reimbursable expenses. Not surprisingly, the executives’ direct reports were also cheating, though not quite as brazenly. And there were plenty of warning signs that something was amiss long before experts exposed the fraud. Accounting personnel had complained repeatedly about questionable expense reports — and were ignored.
Of course, most expense account fraud occurs on a smaller scale. One of the most common methods is to mischaracterize expenses — using legitimate receipts for nonbusiness-related activities. If Paul buys after-work drinks for himself and his friends, that generates an actual receipt. But their bar tab shouldn’t show up on Paul’s expense account. Requesting multiple reimbursements is riskier, but just as simple. If Paul wants his company to pay for drinks twice, he copies the receipt and turns it in on another expense report. Worse, he may attempt to be paid once for the bill, once for the receipt and once for the credit card statement. Some employees simply overstate their expenses by doctoring supporting paperwork — for example, by changing a 3 to an 8 or a 1 to a 4 on a receipt. Then, there are cheats who invent expenses. To pad her expense report, all Christina needs to do is ask a cab driver for an extra receipt, fill it out and turn it in for reimbursement.
Policies and procedures
In most cases, expense account fraud can be averted if companies implement fraud control policies and procedures and then enforce them. Too often, businesses establish policies but fail to make sure they’re followed correctly. Once a company has an expense report policy in place, it should communicate it. Paul needs to know he can’t subsidize cocktail hour on his employer’s dime, and Christina needs to understand that only business-related cab trips are reimbursable. This prevents misunderstandings and makes punishing infractions, when they occur, easier. Also, managers should keep abreast of employee business travel plans and other activities that might trigger expense reports. If Kevin is based in Chicago but submits a bill for a dinner in Las Vegas, his supervisor should have known about the trip before it happened. Supervisors need to review every expense turned in, and require original receipts for everything. If a photocopied receipt is necessary — and sometimes it is — the supervisor should inspect it carefully for signs of tampering. Although expense tracking software can’t substitute for hands-on expense account reviews, it can help spot inconsistencies that develop over time. These programs make it easy to see whether someone’s expenses have soared in recent months or are noticeably higher than those of others in the same department.
At the same time, businesses need to take care that their antifraud policies are fair and reasonable. If the official definition of reimbursable expenses is excessively narrow, some employees may be more inclined to lie on their expense accounts to make up for out-of-pocket expenditures. Also, everyone in an organization must be held to the same standards. The CEO can’t be immune from scrutiny — especially because a CEO who cheats on an expense account may be perpetrating other forms of fraud, including falsifying financial records.
Leave it to experts
Help your clients deal proactively with the problem of expense account cheating by ensuring they have controls in place. But if one becomes victim, contact an expert immediately. A trained professional knows how to root out fraud, collect evidence and, if necessary, testify in court. If you have questions about this, or any other matter, visit www.warrenaverett.com to learn more about our Fraud and Forensic services, as well as Business Valuation and Litigation Support Services.