Preventing expense reimbursement fraud: building a solid foundation

May 2017  |  LEGAL & REGULATORY  |  FRAUD & CORRUPTION

Financier Worldwide Magazine

In 2014, a pair of former executives from the US pleaded guilty to defrauding their employer of $1m. The married couple had held various executive positions at an organisation with offices in the US and the UK. Their scheme ran for over seven years and included both fictitious expenses and multiple submissions for reimbursements. Some of the fictitious expenses included mortgage payments on vacation properties, luxury bed linens, personal legal fees and a dog sofa.

This is an extreme example of reimbursement fraud. In their 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) estimated the median loss from expense reimbursement frauds at $40,000. The median length of an expense reimbursement fraud is 24 months and it has been found that the longer the scheme runs, the larger the loss. Expense reimbursement schemes fall under the larger umbrella of asset misappropriation schemes. According to the ACFE, asset misappropriation schemes make up 83.5 percent of all fraud cases. Expense reimbursement schemes represent 14 percent of asset misappropriation schemes. This estimate is a global figure and varies by region. In the US, expense reimbursement schemes represent 15.8 percent of asset misappropriation schemes, while in Western Europe expense reimbursement schemes represent 18.2 percent of schemes.

Not all expense reimbursement schemes will result in million dollar losses for organisations, but considering how frequently these schemes occur, losses can still be substantial. There are also multiple ways expense reimbursement schemes can occur. Corporate owned credit cards can be used for personal purchases, fictitious reimbursements can be submitted and legitimate expenses can be submitted multiple times. As with any fraud scheme, the best way to avoid losses is to have a solid fraud prevention programme in place. Particularly with expense reimbursement schemes, fraud prevention begins by laying a solid foundation of policies and procedures.

A lack of clear policies and procedures is a common impediment to expense reimbursement fraud cases. Management at the organisation will receive a notice indicating that an employee is committing expense reimbursement fraud. Investigators will start digging through credit card statements and receipts only to find there is not enough documentation to support the existence of fraud. Going back to the opening example, one of the fictitious expenses submitted was mortgage payments for vacation homes. According to publications from the US Department of Justice, the couple had submitted those mortgage payments as expenses related to a cancelled business trip. This raises the question: How were mortgage payments submitted as travel expenses?

The answer is simple – lack of clear policies and procedures or not following policies and procedures that are in place. Documentation of reimbursable expenses should answer the following questions: What is the expense? When did the expense occur? Which employee incurred the expense and what is the business purpose of the expense? If the expense was a meal, who was present?

Whether employees are being reimbursed for expenses charged to personal credit cards or bank accounts, or whether employees are submitting expenses charged to corporate owned credit cards, an expense reimbursement form should be used. This form should identify the employee and allow the employee to explain the business purpose of an expense. Third-party documentation, i.e., receipts and invoices, should be attached to the expense report to support the claims of the employee.

Completion of an expense reimbursement form and submission of receipts should be the cornerstone of expense reimbursement policies and procedures. The foundation is completed by including policies explaining expectations, review procedures and disciplinary actions for policy violations. It is imperative that these policies are applied to all employees within the organisation – including the C-suite.

When writing policies related to expense reimbursements, one of the more difficult areas is determining which expenses are considered a reasonable business expense. There are several factors which contribute to this difficulty. First, determining what is reasonable is somewhat subjective. One employee may consider picking up the tab for a happy hour attended by several colleagues and clients as a perfectly reasonable expense, even if the tab is in excess of $500. Another employee may consider this excessive, or may disagree with purchasing alcohol as a business expense. The legal department may be concerned about the potential organisational liability related to paying for alcoholic beverages. Because of this subjectivity, policies should include basic determinations as to what is considered reasonable, any potential limitations on reimbursable expenses (for example, no alcoholic beverages or no meals over $500), and procedures for inquiry regarding any expenses that are not specifically addressed in the policy.

A second area of difficulty related to determining a reasonable business expense is the frequency of the expense. A supervisor rewarding an employee by buying them coffee could be considered a reasonable expense, unless the supervisor is buying the employee coffee on a daily basis. Again, this becomes a more subjective decision. One supervisor may not see a problem with spending $20 on Starbucks daily for his or her team, while another may see it as excessive and inappropriate. These types of scenarios can also affect employee morale. Imagine an employee working on team A that gets Starbucks daily for doing a good job and compare that employee to one who is working on team B, who is working just as hard, and is never rewarded by his or her supervisor. Frequency of the expense is an important consideration when creating an expense reimbursement policy.

The third difficult area to consider is how the business expense reflects the culture and perception of the organisation. One question to ask when developing policies should be: How would the public or shareholders react if they knew about this expense? Going back to the happy hour example, shareholders for a private advertising firm may not blink an eye at a $500 happy hour, however, would donors to a not for profit organisation feel the same way?

Once procedures related to reimbursement are created, along with policies explaining expectations regarding expenses, procedures related to review of expenses should be in place. Segregation of duties is imperative in review of expense reimbursements. The person reviewing and approving expenses should not be the same person who is submitting the expenses. Specific procedures should be in place to verify if the expense is reasonable, to verify that the expense actually occurred and to verify that the expense occurred at a reasonable time and date. For example, comparisons should be made to employee work and travel schedules when reviewing expense reports. If an employee submits an expense for a day when the employee was scheduled on vacation, this should raise concerns and result in additional questions regarding the expense.

Finally, organisations should establish clear disciplinary procedures for policy violations, and once again, all employees should be subject to discipline for policy violations. No employee is perfect and there will be times when corporate cards are accidentally used for personal purchases, receipts are lost, technology issues result in receipts not being generated or employees are not clear as to what is a reasonable business expense. Policies should be lenient enough to allow for mistakes, but strict enough to prevent abuse of the expense reimbursement system. One example for organisations with corporate cards is to allow a lost or missing receipt three times. After the third occurrence, the employee loses the privilege of using a corporate credit card and is required to use his or her personal credit card for expenses. Disciplinary procedures should be designed with the tone and culture of the organisation in mind.

Expense reimbursement fraud can be a costly problem for any organisation. Organisations can battle this problem by establishing a solid foundation of policies and procedures, including procedures for submitting reimbursements, policies explaining expectations, review procedures and disciplinary policies and procedures. This foundation reduces the opportunity for expense reimbursement fraud to occur, provides clear expectations for employees and prevents more organisations from unknowingly purchasing items such as luxury linens and dog sofas.

Anne M. Layne is a partner at McHard Accounting Consulting LLC. She can be contacted on +1 (505) 554 2968 or by email: alayne@themchardfirm.com.

© Financier Worldwide

BY

Anne M. Layne

McHard Accounting Consulting LLC