Reviewing current and historical fraud data reveals an implausible finding: despite the refinement of company fraud prevention programs and a corresponding sophistication in employee fraud schemes, the old bogus expense report is a bigger problem now than 16 years ago.
Semi-annual surveys conducted by the Association of Certified Fraud Examiners (ACFE) indicate that theft in the form of a claim for reimbursement of fictitious or inflated business expenses, as a percentage of employee fraud cases, has grown more than twice as common today as in 1996. ACFE’s examination of employee fraud cases—reported in its 2016 Global Fraud Study—found that 15.8 percent include expense report fraud schemes: claiming personal expenses, overstated expenses, fictitious expenses, and multiple reimbursements.
Expense reimbursement is a particular problem among technology companies, accounting for 27 percent of their employee fraud cases. Among retailers, expense report fraud accounts for 8.7 percent of employee fraud cases, according to the ACFE. While it’s not as problematic for retail organizations as for companies in many other industries, expense report fraud is a bigger problem for retailers than it is for banking and financial services firms.
Who does it? Accounting and executive/upper management are the departments most commonly associated with expense reimbursement fraud, according to ACFE data. It comprises 15.8 percent of fraud cases involving accounting staff and 23.7 percent of executive management fraud cases.
Is it a real problem? The effects of reimbursement fraud “can be many and deep,” said Becky Seidler, a senior manager with KPMG Forensic. “In addition to financial losses, which can be larger than what many might expect, there can be severe and lasting impacts on an organization.” One example is how bogus reimbursement by top management can filter down into the organization and result in rampant copycat fraud. It may also not play well with stakeholders. “Negative publicity and reputation damage can be expected when media, shareholders, or other interest groups learn of irregular handling of expenses,” Seidler told At Risk magazine. Additionally, getting away with a less-than-honest expense reimbursement can be a slippery slope into other deceitful behavior, she noted.
The Washington State Auditor’s Office and other experts, in an effort to help organizations detect and prevent fraud, offer the following red flags and prevention and detection tips for employee reimbursement fraud.
Red Flags Indicating Possible Expense Report Fraud
- Expenses exceed what was budgeted for prior year totals
- Expenses were claimed on days the employee did not work
- Minimal or nonexistent support behind the request
- Support is comprised of photocopies, not originals
- Expenses all end in round numbers
- Reports were approved by someone outside the department
- Unusual or excessive reimbursements were awarded to just one employee
- A consistent submission of expenses just under the threshold for requirement of receipt (i.e., frequent expenses of $24 when the threshold is $25)
- Receipts without a GST registration number
- Sequentially numbered receipts
- Receipts that look familiar (has it already been submitted?)
- Delays in submission (employees may be hoping that individual approving reimbursement won’t remember if the expense was business-related or whether it had already been submitted)
- Registration forms (conferences, courses) without proof of payment, such as a proper receipt or statement
Preventing Employee Theft via Expense Reimbursement
Implement adequate segregation of duties or other compensating controls. Establish policies and procedures and ensure they are enforced. Require a detailed expense report with original receipts and documentation attached every time. Establish a policy that requires a supervisor with knowledge of employees’ activities to approve the report. Ask questions and get a supported answer. Consider the use of data analytics to detect abnormalities; this is particularly useful for larger organizations with significant volumes of data. Lastly, perform an annual review of the process as part of the company’s internal audit program.
This post was originally published in 2017 and was updated October 4, 2017.