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6 Types of Expense Fraud & How to Prevent It

As a business leader, you want to trust your employees. But even the most reliable, well-meaning employees can make mistakes. Then there are those who, unfortunately, may take advantage of your company. Both groups can pose the risk of expense fraud.

Also known as expense reimbursement fraud or spend fraud, expense fraud occurs when an employee claims reimbursement for false or inflated business expenses. And it can cost small businesses everything.

The Association of Certified Fraud Examiners (ACFE) found that companies with more than 100 employees see a median expense fraud cost of about $30,000 per year–but companies with less than 100 employees can expect to pay an average of 28% more.

So, why and how is this form of fraud so common? Workers do it because it’s often easy to get away with, and reimbursements are not taxable. Although, expense fraud frequently occurs simply due to poor systems and human error. Companies overlook it because they’re busy, and frankly, reviewing every expense can be a hassle. But these expenses can add up, costing your organization thousands or even millions.

Consider how you handle vendors. You wouldn’t pay a vendor for a service without an itemized invoice showing the work they performed. Why would you accept an expense report from an employee without proof?

Now that you understand why it’s essential to keep an eye out for expense fraud, let’s look at how it occurs and the ways you can prevent it.

6 Types of Expense Fraud

Expense fraud can be intentional or accidental. Either way, you should watch for the following red flags and act if necessary.

Exaggerating or falsifying expenses

Employees might make up expenses and receipts. However, it’s more common that they exaggerate certain costs, rounding up a few dollars here and there. These minimal amounts are so easily overlooked but can quickly add up. Before you know it, one employee could be reporting up to $500 per month in inflated expenses, which comes to $6,000 over the year! Imagine if you had multiple employees altering their reimbursements to that degree?

Prevent it by:

  • Requiring original receipts with every expense report

  • Putting a limit on the reimbursable amount allowed without a receipt (e.g., nothing over $5 will be paid out without a receipt)

  • Requiring prior authorization (e.g., require prior approval for any expense over $500)

Inflating business travel expenses

This form of expense fraud can happen in a couple of ways. Often, the issue is that people simply don’t realize they can only submit reimbursements for either gas OR mileage, not both. On the other hand, employees who drive a lot for their job may take the longest route, maximizing their mileage.

Prevent it by:

  • Outlining allowable travel expenses in your policy

  • Requiring employees to use a tool like MileIQ or submit a Google Maps screenshot of their trip

Submitting personal purchases

Ah, the debate of business vs. non-business purchases. This issue can occur intentionally or unintentionally, especially when your expense policy is not clearly communicated.

Prevent it by:

  • Developing a detailed expense policy listing what types of expenses qualify as business-related and which do not

  • Training management and employees to avoid confusion or temptation

Abusing the corporate card

The benefit of providing company credit cards to employees is that your accounting department doesn't have to worry about reimbursements. The expenses are consolidated so they can easily monitor trends and confirm charges.

The downside is that employees could overspend and assume that accounting will simply pay the bill without a second thought. Don’t let this happen! Even with an automated corporate credit card platform, it’s crucial to remain vigilant.

Prevent it by:

  • Setting spending budgets for business travel

  • Setting credit card spending limits

Duplicating expenses

Duplicate expenses can occur in a couple of ways. First, a traveling employee might list the same charge under two different trips.

Employees with corporate credit cards can also duplicate expenses, another reason to closely monitor usage. An employee could charge something to their company card, then submit a receipt for the same purchase as a cash expense.

Prevent it by:

  • Using automated expense management software, which allows you to put controls and alerts in place

  • Requiring original receipts

  • Refusing to reimburse cash expenses without receipts

Splitting up large expenses

Sometimes, employees can get creative by splitting significant charges into two or three items on an expense report. Say an employee spends $300 on meals but only attributes $100 to meals and attributes the remaining $200 to their hotel stay. This might keep them under their meal limit and allow them to get away with overspending on a certain expense.

Prevent it by:

  • Setting spend limits on a per-trip or per-category cost basis

  • Establishing different budgets for employees who travel vs. those who do not

How to Prevent & Spot Expense Fraud

The three primary reasons expense fraud occurs are clunky manual technology, a lack of communication and enforcement of the policy, and poor ethics. While an employee’s ethics may be challenging to fix, your business can put processes and procedures in place to mitigate the other two and prevent issues.

Keep in mind, this should be a collaborative effort between management, HR, and accounting to communicate the policy, enforce it, and maintain a careful review system.

Develop a detailed expense policy

Your first line of expense fraud defense is a comprehensive expense policy. Communicate this policy clearly and regularly. Include it in the employee handbook, review it during new hire onboarding, and share regular company-wide reminders.

First, your expense policy should specify allowable and reasonable expenses (e.g., employees may not rent the most expensive car or stay at a five-star hotel).

Next, define a reimbursement time window (e.g., if an employee submits a reimbursement for more than 60 days ago, they will not receive reimbursement). This also enables more control over cash flow, as someone can’t come to you with $7,000 worth of travel expenses at the end of the year.

Finally, outline acceptable receipt requirements. Speaking of receipts…

Require original itemized receipts

Don’t just accept any receipt! Make sure it is the original version AND that it is itemized. This should also be a part of your expense policy.

For example, restaurants often give you the customer version with no line items–make sure employees turn in the detailed receipt from each meal.

Every receipt should include:

  • Items purchased

  • Date

  • Vendor’s business name

Don’t accept general third-party payment portal receipts like PayPal, which are not itemized. Employees should provide the original vendor receipt showing what items or services were purchased. And don’t simply go by an expense line on a bank or credit card statement. If you need to, call vendors to verify large or frequent expenses.

Establish a layered review process

It’s critical to have more than one person reviewing expense reports. You can achieve this by setting up a simple process:

  • The employee submits the reimbursement request to their manager.

  • The manager reviews and signs off on the expense report then submits it to accounting.

  • Accounting performs the final review and issues payment.

Another best practice is to establish a dollar threshold–this means if someone submits a reimbursement over a certain amount, either individually or as a list of expenses, it needs to be approved by a member of the executive team or ownership (e.g., expenses over $1,000). This ensures an extra level of accountability for large transactions.

Invest in automation

Manual expense reporting opens up your business to both mistaken and purposeful expense fraud. Not to mention, it wastes company time and money!

Today’s high-quality automation platforms will notify your accounting department of discrepancies, pull auditable reports, and process extensive documentation accurately–all while boosting efficiency. Using an automated expense reporting system will significantly reduce the risk of expense fraud and catch any potential occurrences.

Monitor spending by employee and position

This one mainly requires a sharp eye and common sense. Keep track of spending trends and how they correlate with your ROI. Managers and other high performers should have higher expenses, as they know how to spend company money wisely. If you notice an instance in which this is not the case, investigate it further.

Those in the same or similar positions should have similar expenses, so a large discrepancy between employees in the same role is a red flag. Those in the same or similar jobs should have similar spending. For example, Michelle and Sarah are two client account representatives. You realize that Michelle expensed $6,500, while Sarah expensed only $2,000. It might be time for a closer review of Michelle’s reimbursement reports to determine if she is inflating or manipulating the numbers.

What to Do If You Discover Expense Fraud

In the unfortunate event that you uncover expense fraud in your organization, you will need to investigate and determine what action to take next.

  1. Investigate without jumping to conclusions. Review the amounts and history to see if it’s an honest mistake or an ongoing pattern of fraud.

  2. Take screenshots and compile relevant reports.

  3. Turn off the employee’s access to credit cards and other accounts before more fraud can occur.

  4. Conduct a meeting, termination, and legal action if necessary.

Establishing spending policies and processes and educating employees are crucial to preventing expense fraud. Combined with a robust automated expense management system, these will protect your business significantly.

If you have more questions about expense fraud and how to prevent it, contact us Check & Balance’s accounting experts today at 603-505-2368 or schedule a free consultation!

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