By B.J. Hoffman
Special to the Legal
As outlined in a recent study by the Association of Certified Fraud Examiners, businesses typically lose 5 percent of annual revenues to fraud, waste and abuse. Fraud comes in many shapes and sizes, ranging from fictitious vendor schemes to “ghost” employees and inventory that perpetually falls off the back of company trucks.
Perhaps the most common schemes, though, are the smallish, “drip…drip...drip” losses from inflated employee expense reimbursements. Though the individual dollar amounts of these abuses tend to be low, often the losses are widespread within a company and occur over extended time periods. Accordingly, company losses grow to material levels.
Expense reimbursement schemes can be grouped into several categories:
- Personal expenses mischaracterized as business-related: Examples include personal lunches that are mischaracterized as business-related, or auto reimbursements for personal trips.
- Fictitious expenses: Reimbursement for expenditures that are never made by the employee. For instance, an employee who has access to a stack of blank toll receipts, or who writes a personal check for a business expense, later voids the check, and submits a photocopy of the original check to the employer for reimbursement.
- Overstated expenses: Legitimate business expenses incurred by an employee are overstated by altering supporting documentation. Also possible is inflation of expenses, where an employee is able to submit receipts for one level of travel, but where actual travel is at a less expensive rate (the classic example is reimbursement for business class airfare, while actually flying coach).
- Multiple reimbursements for the same expense: The employee is reimbursed more than once for a single business expense. An employee who is reimbursed for airfare based on a booked itinerary report, and then requests reimbursement based upon a credit card charge statement. Employee expense reports receive less scrutiny from employers, as amounts are often low. Also, employers want to trust employees, and don’t ordinarily want to disrupt workplace culture by imposing police-state-like rules. However, this trust is what allows for losses to accumulate.
Employers and auditors should be on the lookout for several indicators of potential expense reimbursement schemes, including:
- Expense reports that lack supporting documentation or which ordinarily are not subject to any review.
- Employee reimbursements that exceed annually budgeted amounts.
- Supporting expense documentation that is composed of photocopies, rather than original invoices.
- Submission for reimbursement of dated/old expenses.
- Reimbursement requests for “cash” expenses.
- Multiple expenses in the same or similar dollar denominations, or for rounded dollar amounts, or for total amounts that fall just shy of a predetermined threshold for further employer review.
Of course, it is preferable to devote resources to discouraging employees from attempting to falsify expense reports, rather than trying to ferret out individual fictitious expenses. Accordingly, policies should be developed and communicated to employees that outline acceptable expense reimbursement procedures, such as:
- Requiring detailed descriptions on expense reports, including the expense’s time, date, individuals involved and purpose.
- Mandating that original supporting invoices (not copies) be attached to the report.
- Outlining limitations on elapsed time under which an expense will be reimbursed (i.e. monthly).
- Listing specific types of reimbursements that are (or are not) reimbursable, and at what rates.
All expense reports should be first reviewed by the employee’s direct supervisor, as he or she has a deep understanding of the employee’s daily activities and would be the most knowledgeable party in determining whether an expense is reasonable.
Development and adoption of clear policies and procedures regarding employee expense reports will serve to limit losses to fraud, waste and abuse, and such savings can be highly material over time.
B.J. Hoffman is a certified public accountant and certified fraud examiner for Citrin Cooperman, an accounting, tax and business consulting firm. A partner in the Philadelphia office, he provides clients with a mix of audit, tax and litigation support services. He often works with closely held entities in a variety of industries, including professional service firms and real estate enterprises. He can be reached at email@example.com or 215-545-4800.