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 commit this crime can cause a lot of financial damage to companies, 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 uncovered fraud.
There will always be employees looking to gain 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 whereby 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. But also, thoroughly assess and investigate inaccurate claims 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 that’s actually largely for leisure.
Other common reimbursement fraud schemes can include employees submitting:
- Bills for trips that were never taken, such as cancelled airline tickets or hotel registration refunds
- Claims for items they didn’t purchase, such as office supplies
- Separate car mileage bills from employees who, in fact, travelled together
- Inflated mileage totals
- Bills for non-reimbursable expenses, such as alcohol or tickets to leisure activities
Some employees are habitual cheaters and profiteers who stock up on blank receipts from cab companies and restaurants to submit phony expense reports.
It’s important to note that expense fraud is, quite often, carried out by those who are inherently honest and don’t intend to defraud their employer of huge amounts of money. More commonly, employees commit small acts they don’t associate with fraud because it’s easy 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 seeds’ when it comes to expense fraud cases, but it’s still an issue that needs to be monitored. Large or small, expense fraud really does cut into a company’s bottom line, driving up business costs in the process.
How big a problem is expense fraud in most companies?
A 2022 study done by the Association of Certified Fraud Examiners concluded that expense reimbursement fraud accounts for 7% of fraud in small businesses (those with less than 100 employees), and 11% in large businesses (those with 100 or more employees). Canada and the US had the highest number of fraud cases in the world in 2022.
Businesses often overlook expense fraud because the sums of money involved can seem trivial, but the costs can quickly add up. Expense fraud is the 4th highest type of occupational fraud at 17%.
Fraudulent employees tend to spread expense reimbursement scenes out over long periods of time: the median length of expense claim fraud is 18 months and the median loss $40,000.
If you come across expense fraud, it’s important to be aware that it can also be a sign of 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 organizations than others?
Companies often wonder what motivates their employees to take such a big risk for seemingly so little reward. However, reasons vary from person to person and company to company.
Many people justify expense fraud with one of the following arguments:
- The company owes them. Employees claim they are out-of-pocket due to work-related expenses. Because reimbursement for work-related expenses happens slower than they may wish, they feel entitled to ‘charge 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 little extra treat at the company’s expense when on a work trip.
- Their colleagues are getting away with claiming false expenses, so why should they be honest?
- They’re not happy with their salary and see an opportunity to give themselves a raise.
With today’s workplace vastly different from those of previous generations, a culture of freebies and perks has become part of the mindset for 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 fudging is no longer objective.
The rising cost of living may incentivize some employees who only tooka chances with minor amounts historically. And during times of economic slowdown and recessions, the uncertainty 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 as 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 forge 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 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 prevalent behaviour across the organization if allowed to continue and there is also a risk that it escalates to larger-scale fraud.
How to identify and prevent expense fraud
Safeguarding your organization from becoming a victim of expense report fraud doesn’t have to be complicated. But there’s no quick solution. It’s important to start with careful internal checks —there are a few key steps finance teams can take into consideration to help cut down on these instances and minimize the impact it has on 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 travellers. 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 travellers 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
Use corporate charge cards to exercise greater control. With corporate cards, companies can look at the bills of each card and get a better overview of spending. You’ll also be able to receive credit activity reports on a monthly basis from the credit card company.
4. Selective auditing
A good practice is to audit 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, you can assume that employees are 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 how old your expense rates are: cities with growing tech centers have become more expensive in the last 5 years, so perhaps it is time to revisit your policy. Or consider the regional variance in the cost of living: a meal in Vancouver is likely to cost more than a meal in Montreal. Our guide on CRA per diem rates will provide some reference on what is deemed a fair and tax-free amount per province. For Canadian city per diems, click here.