The significant reduction in travel and expense (T&E) spend due to global travel restrictions has led CFOs and finance teams to expect minimal expense fraud. Fewer business trips and fewer expense reports equal fewer fraudulent claims—right? Unfortunately, this hasn’t been the case.
Recent research has concluded that there has been a 292% increase in T&E spend violations worldwide compared to the pre-pandemic period. While the pandemic-induced rise in remote work has helped retain employees, improve work-life balance, and reduce overhead, the mass shift from conventional to remote work has resulted in a sense of ambiguity and instances of loopholes in expense policies and reimbursement.
The first step to curbing expense fraud is understanding the effect that fraudulent claims have on the firm’s bottom line. Here’s all you need to know about fraud detection and management in a hybrid working environment.
Diving deep into expense fraud during remote work
A significant percentage of businesses have been setting up fully-fledged permanent remote work arrangements without comprehending the potential impact this could have on their T&E spend. For one thing, there’s been a changeover in expenditure categories: Air tickets and lodging are no longer the top spend categories. According to the Spend Insights report by Oversight, the amount of funds spent on meals, office supplies, internet, and miscellaneous expenses has increased exponentially.
These are also the four expense categories that have triggered the most policy violations and have accounted for nearly half of all the expense policy violations. Employees who purchase out-of-policy items—like high-end devices and gaming chairs—and then claim reimbursement by citing remote work expenses have influenced this unforeseen increase in expense fraud. Another important point to keep in mind is that the pandemic has generated a lot of new spenders; before the pandemic, only a small fraction of employees ever submitted expense reports, but there has since been a 12% increase in new spenders overall. Relatively new employees who are unaware of the firm’s expense policies often end up using company funds inappropriately by submitting claims that result in accidental policy violations.
The non-compliant spend patterns and the risks associated with them are likely to challenge cost-saving efforts as firms adapt to remote work. Some firms initially turn a blind eye to policy violations if the amount of money involved isn’t significant; however, this aggravates the situation by indirectly incentivizing employees to commit expense fraud, since they can get away with it. This is why businesses must now pay close attention as fraudulent claims transition from business class tickets and minibar services to overstated electricity and internet expenses and fictitious furniture claims.
In order to tackle these issues, your finance team must first be aware of the different types of expense fraud. In its 2020 Report, the Association of Certified Fraud Examiners (ACFE) estimated that 5% of all revenue generated by organizations around the world—or around £3.5 trillion—is lost every year through employee-initiated expense fraud.
Types of expense fraud
Here are some common types of expense fraud listed by the ACFE you should be aware of:
These are legitimate expenses that are overstated by the employees. This is mainly done in firms where out-of-policy expenses are often detected, in which case it’s much easier to pad a legitimate expense and pocket the difference. According to the Global Payroll Association, the most common fraudulent cases relate to inflating mileage (27%) and overstating cab receipts (16%).
Employees can digitally alter final prices on photocopies of receipts—meaning a $10 cab ride to a hub office can quickly be inflated to $30. Other ways that employees overstate amounts include adding small amounts to expenses like office supplies, falsifying mileage totals, or exaggerating fuel reimbursements since receipts mostly aren’t required if employees are using their cars for business purposes.
When the same expense claim is reported more than once, it’s a duplicate reimbursement. For instance, an employee could use their corporate card to purchase an item and then submit a receipt to claim reimbursement for the same item. Some other examples of multiple reimbursement fraud include submitting an old receipt that was already reimbursed under the guise of a forgotten expense claim, or colleagues splitting the bill for a business lunch but separately claiming full reimbursement by providing the same receipt as proof of payment.
These are expenses an employee gets reimbursed for when they were never really incurred in the first place. Such claims are usually backed by fake receipts, and these cases are often done with malicious intent, as opposed to double reimbursements, which are often human error. For instance, if your firm has a policy that does not require receipts for expenses under a certain amount—say, $30—then a dishonest employee would report such expenses without receipts, claiming to have lost them. Other examples include claiming reimbursement for fictitious home office supplies, client luncheons and gifts, or registration fees for virtual events and workshops that never materialized.
This type of expense fraud occurs when an employee tries to pass off personal expenses as business expenses to claim reimbursement. This is probably one of the easiest types of fraud to commit since all it takes is submitting receipts for personal expenses as business expenses. For instance, Good Fortune Burger, a burger chain in Toronto, recently refreshed their menu by renaming their food items as office supplies so employees working remotely could expense their lunches as office supplies. Some other examples include claiming personal travel as business-related, or claiming reimbursement for a meal with their family as a client dinner.
Here’s the takeaway
As your business starts or continues remote or hybrid work, it’s imperative that you revisit your underlying systems. With 79% of firms around the globe witnessing a rise in overall fraud, businesses are increasingly devising strategies to detect and control policy breaches and fraudulent claims. One such strategy is investing in online expense management applications in a bid to overcome compliance risks. By switching to online expense management software like Zoho Expense, you can automate the process from end to end and make it easy for your employees to use as well. With Zoho Expense, your employees can record expenses as soon as they’re incurred, while your finance team can leverage the AI-driven features to detect fraudulent expense claims, validate receipts, blocklist merchants, and make deceptive practices far more difficult.