Where there is money, there is crime. Perhaps that is why expense fraud is prevalent in firms of all sizes despite being illegal. According to the 2018 report by the Association of Certified Fraud Examiners, expense reimbursement cases account for 21% of fraud in small businesses and 11% in enterprises.
While it may sometimes be an honest mistake, it is hard to decipher the actual motive behind a fraudulent act. Your firm cannot afford to lose funds while waiting for you to discover this motive or hoping for your dishonest employees to get caught.
According to the ACFE Global Fraud Study, 5% of a typical organization’s annual revenue is lost due to fraud. This 5% is made up of expense fraud cases with varying risk levels. Expense fraud can range from an out-of-policy airline seat upgrade to having your firm pay for a joy ride in a private jet with your friends. It sounds unbelievable, but it has happened.
PACE Worldwide defrauded of $1 million by the Dunhams
Paul and Sandra Dunham worked at PACE Worldwide, an electronics firm. While Paul was the President and Chief Operating Officer, his wife Sandra was the Director of Sales and Marketing. The couple relocated from the European subsidiary of the firm to the US. They were provided with corporate credit cards by the firm to manage their corporate and travel expenses.
Between 2002 and 2009, the couple stole $1 million from the firm by misusing their corporate credit cards and submitting false reimbursement requests. For example, Paul was reimbursed $3007 that he claimed to have spent on business luncheons when he had actually spent that amount on luxury bedding for his residence in North Carolina. To make it worse, Sandra sought reimbursement for about $8,397 incurred to cancel a vacation due to a business meeting. The amount was actually used to make mortgage payments for their timeshare units in Barbados. They continued to pay for personal legal fees, furniture, pet housing, expensive fountains, and more with corporate travel expense reimbursements.
They went one step further and fraudulently billed PACE Europe Ltd. for business expenses already paid for by PACE Worldwide, obtaining duplicate reimbursements. When their fraudulent schemes finally came to light, they were extradited to the US to face fraud charges and sentenced to serve time in the federal prison.
Expense report fraud cases can range from a few dollars of fake receipts to millions over time if left undetected. Understanding the nature and types of expense fraud can help you detect, prevent, and control situations like this. We have put together the most common types of expense fraud your firm could be susceptible to:
When an employee tries to get reimbursed for expenses or purchases that never really happened by backing them up with fake receipts, it’s categorized as fictitious expense fraud. These cases are blatant and should not be confused with human error.
If your firm has an expense policy that does not require receipts for expenses under a certain amount, dishonest employees can take advantage of this loophole to submit expense reports without receipts, claiming they lost them.
Here are some common fictitious expenses:
Claiming reimbursement for purchases that were never made like office supplies or expenses that were never incurred like client luncheons or gifts
Using complementary meals or rides offered by the hotel, and then claiming reimbursement for them without receipts
Submitting expenses that never happened, like cancelled air tickets, registration fees for events or workshops, professional subscriptions or payment dues, transportation, or tuition allowances
Producing receipts that are fake or tampered with using online receipt makers and design tools
Collaborating with the merchant or vendor to obtain receipts for purchases that never occurred
Mischaracterized or mislabeled expenses
There are instances when employees try to pass off personal expenses as business-related ones for reimbursement. This is probably one of the easiest types of expense fraud to commit. All it takes is to submit receipts from personal expenses as reimbursements. Like fictitious expenses, mislabeled expenses cannot be mistaken for human error.
Often times, employees incur personal expenses on business trips. These are then craftily framed to mimic business expenses. While you are reimbursing your employee who has returned from a bleisure trip for their air tickets and accommodation, you might be paying for their family dinner or spa sessions as well. It is not very uncommon for employees to submit expense reports that contain travel-related expenses when the employee is not traveling or receipts that include items for children.
When the same expense is reported multiple times, it is a duplicate reimbursement. It may be human error or not, and it’s slightly difficult to tell them apart.
Let’s say an employee submits their expense report for a recent business trip on Friday. While they are rummaging through their bags on Saturday, they find a receipt they had forgotten to include. If your expense policy allows, they can still go ahead and submit it to claim reimbursement. This is a case of an honest mistake. A dishonest employee might submit the report and, after a couple of months, resubmit a “lost” receipt.
Double-billing is another common way of obtaining multiple reimbursements. This is when employees obtain more than one proof of payment for an expense, like a credit card receipt and the original receipt. They may submit the receipts as individual expenses under the same or different trips to get reimbursed twice. For example, if two employees dine together and they are both given a receipt, they could both claim the total amount instead of splitting the amount.
Another way employees can claim duplicate reimbursements is by charging the firm’s corporate credit card and then submitting a receipt for the same expense as a cash charge. They can also use public transportation and still choose to claim mileage reimbursement as if they drove to the location themselves.
Refunded expenses or unused credits
There are instances where an employee purchases an item, obtains a refund later, and then submits the original purchase receipt for reimbursement. This is refunded expense fraud, and it’s most common with cancelled or rescheduled flights/accommodation or refunded products.
Let’s take the example of a cancelled or rescheduled flight. An employee may purchase two refundable air tickets for a trip—an expensive one and a less expensive one. After submitting the expense report for the first ticket, they can cancel the flight and get a refund. They would then use the less expensive ticket for the business trip.
Now what if the ticket really got cancelled or rescheduled? A sneaky tactic would be to book the ticket a second time and claim reimbursement for it instead of paying the smaller fee to rebook the first ticket.
Violating expense policy
Despite having an effective expense policy in place, it is hard to ensure 100% compliance. There will always be employees who fail to abide by the guidelines. Also, if the policy violations are not huge, they are likely to go unnoticed. It’s important that your organization does everything in its power to make employees aware of the expense policy in place and the consequences for violating it.
Here are some common out-of-policy expenses:
Alcohol and cigarettes: Most firms do not reimburse cigarettes, alcohol, and mini-bar purchases. However, that does not deter employees who submit expenses for after-meal drinks when the expense policy clearly allows reimbursement only for the meal.
For example, your employee visits the Twin Peaks sports bar for dinner and drinks. They submit an unitemized receipt with the merchant name ‘Front Burner Restaurants,’ which happens to be the parent company. This is likely to go unnoticed, and they could end up getting reimbursed for their meal with drinks included.
Travel upgrades and add-ons: Going against the policy by choosing premium seats, priority boarding fees, or upgrading rental cars are some examples of travel expense fraud.
What is easier than taking the trouble to violate an expense policy? Padding a legitimate expense to pocket the difference. A $2 ride or meal becomes a $10 one.
Here are some ways in which employees may inflate expenses:
Periodically adding small amounts to expenses like cab rides or meals
Choosing an expensive alternative for air tickets or car rentals when cheaper options are available
Expensing an inaccurate tip amount for dining
Claiming inflated mileage totals when they are driving for business purposes or exaggerating fuel reimbursement.
Here’s your takeaway!
Despite most of your employees being honest and law-abiding, a small fraction might be those who commit fraud. These types of activities can be costly for your business when left undetected. This is why it is important to stay updated on the different types of expense fraud, identify any patterns and loopholes in your system, and ensure adequate controls and checks are in place.