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Eight Ways to Combat Expense Account Fraud

Eight Ways to Combat Expense Account Fraud

Expense account fraud via bogus expense reports is one of the most prevalent, yet also most preventable, organizational frauds there is—and it has possibly been around the longest. Just picture early pioneers telling the boss that they fed his horse four (no, wait five) bales of hay while he was away!

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Not only does expense account abuse erode profits or create losses in an organization, it creates an environment in which employees think they can get away with stealing (“by just getting a little extra for my troubles” or “since it makes up for the expenses I’ve forgotten about in the past anyway”). And then, perhaps one day they will graduate to more lucrative schemes.

Additionally, poor reporting can negate tax deductions if you ever get audited by the IRS, or it may prompt a visit from the Department of Labor (DOL) someday if you are a not‐for‐profit organization.

For these reasons, and more, your organization should have strict expense account policies. Here are eight specific suggestions:

1. Create a written document that explains your entity's policy on how expense reports will be handled and enforce the policy with all personnel (employees, members, management and owners).

2. Include a deadline for submitting expenses within your policy (e.g., no later than 30 days after the expenses are incurred). This prevents employees from turning in claims for old "forgotten or misplaced" expenses, especially when they run into personal cash crunches.

3. Require everyone submitting expense reports to read and sign the document. Then, keep a copy in their personnel/permanent file.

4. Insist on original copies of expense documentation such as cash and credit card receipts (not just a copy of the statement), hotel bills, rental car agreements, etc. (No Receipt=no reimbursement.) Technology only makes it easier for dishonest people to create bogus documents and then copy them to create a paper trail that appears to be legitimate. Additionally, accepting photocopies leads to the potential “double‐dipping” next month. (I once saw a copy of the same gasoline receipt submitted by a company’s plant manager twelve months in a row while performing an investigation into why expenses were so high compared to operations in other states!)

5. Require all of the following for client meal and entertainment expenses in expense reports:

  • The business relationship the person has to your organization.
  • The business reason for the expense.
  • The date, time, and place where the expense was incurred.
  • The amount of each specific expense item (with no aggregation, i.e. “Ballgame + Food /$150”)

Not only are these specific facts needed to comply with IRS and DOL regulations and standards, requiring them also make those submitting reports for reimbursement think twice about fabricating or stretching facts (e.g., personal, family or friend activities claimed to be business related).

6. Designate one person to be in charge of gathering, reviewing and approving all expense reports, who is also responsible for ensuring uniform adherence to the policy. Your company will benefit as this person gains expertise in administering the policy and holding everyone accountable to the same rules and procedures.

7. Match travel logs/appointments to items on expense reports. Be alert to spot potential trends or inconsistencies, such as taxi receipts that seem out of line or excessive. People often ask cab drivers for (or are just given) blank receipts that they can complete later, maybe with higher amounts than paid, or from two people traveling together who shared a cab, but both submit receipts.

8. Require authorization of all expense report claims by an individual at a high level within the organization before payment is made. Be sure everyone reading and signing the policy knows that this is part of the process. This adds the “perception of detection” to make those submitting expense reports more reluctant to turn in bogus reports when they realize that someone in a position of power reviews all reports and supporting documentation.

These are but a few tips to deter employee expense report fraud. It is, of course, impossible to eliminate expense account or any other fraud scheme, but with effective and consistently enforced policies, any organization can minimize the amount and frequency of fraud.

Author: Richard C. Gordon, CPA/ABV/CFF, CFE, CGMA, Director of Forensic and Valuation Services


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