Stop Employees From Committing Expense Report Fraud

American businesses are plagued by many forms of fraud. Among the worst culprits is expense report cheating. Although median losses associated with individual incidents are low compared with those of financial statement, inventory and other types of fraud, falsified expense reports are dangerous because they rarely occur in isolation. Expense reimbursement cheating often is a sign of larger cultural problems — such as lax enforcement or management overrides of internal controls.

Popular schemes

Expense reimbursement fraud generally takes the following forms:

Altered receipts. An employee changes a receipt or other documentation to show a higher expense than he or she actually paid. Employees frequently use photocopying alteration or photo editing software when their company doesn’t require original documentation to be attached to the expense report.

Mischaracterized expenses. An employee disguises a personal expense as a business expense on his or her expense report. Typically, employees make use of this technique when they’re traveling or entertaining.

They might, for example, submit the restaurant bill for a dinner with family members or friends, disguising it as dinner with prospective customers or clients. An employee may even try to submit the expenses of a family vacation — including airfare and hotel stays — as a business trip. Although any staff member might attempt such a scheme, upper-level managers are more likely to get away with mischaracterizing expenses.

A slight twist on this scheme may occur when an employee eats out with co-workers, picks up the check and pays it — but is reimbursed in cash by the other employees for their share. He or she then submits the receipt to his or her employer for full reimbursement.

Fictitious receipts. An employee uses bogus receipts and documentation to obtain reimbursement from the company for a nonexistent purchase. Some employees may use blank receipt forms from taxi services, restaurants and bars. Others may even design and print their own forms, which look so real it’s difficult to tell they’re fakes.

Duplicate receipts. This occurs when an employee submits the same receipt many times for reimbursement. For instance, a staff member may use an airfare receipt for reimbursement and then, in a subsequent expense report several months later, use a credit card statement or some other documentation to support the same expense. Also, if the company doesn’t require submission of the original document, he or she may copy the same receipt several times and submit the expense for reimbursement.

Stop it before it starts
Implementing, communicating and enforcing internal control policies is the key to preventing expense report schemes from thriving. For example, companies need to decide what is and isn’t a reimbursable expense and set limits — such as stipulating that employees fly coach and stay in midprice hotels. Employees should be required to submit their expense forms with original receipts to their direct supervisors for approval before submitting them to accounting.

For their part, managers need to keep abreast of employee business travel plans and other activities that might trigger expense reports, and then compare those plans with actual reported expenses. Although it’s best to request original receipts, photocopied receipts are necessary sometimes. Supervisors should scrutinize these carefully for signs of tampering. Also, expense tracking software can help managers spot expense report inconsistencies that develop over time — for instance, when an employee’s expenses have soared in recent months or are noticeably higher than those of colleagues.

Rarely isolated
When a client suspects expense account cheating, contact a forensic accountant to investigate the claim. To confirm or deflate suspicions, these experts do everything from interviewing employees to combing through electronic data. Also help your client understand that, if fraud is occurring, the incident is unlikely to be isolated and the company may need to bolster its internal controls.

© 2014