A Roadmap for Preventing Expense Reimbursement Fraud

Internal fraud, also called occupational fraud, is often committed by an employee within the organization for his or her personal enrichment through the misuse and misapplication of the organization’s resources or assets. It is generally categorized into three basic types (1) corruption; (2) asset misappropriation; and (3) financial statement fraud. Expense reimbursement fraud is part of asset misappropriation schemes and, according to studies, is by far the most common type of fraud.

According to the 2018 Report to the Nation on Occupational Fraud and Abuse, published by the Association of Certified Fraud Examiners (“ACFE”), employee reimbursement fraud existed in 14% of all asset misappropriation cases reported, which resulted in a median cost of approximately $31,000 per incident with a median detection time of 24 months.

The ACFE defines expense reimbursement fraud as a fraudulent disbursement scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expenses. The problem is that many companies entrust employees to self-report business expenses for reimbursement.

Understanding reimbursement fraud and improving controls can help prevent and detect these crimes. Without proper controls and checks, however, this process provides employees with the opportunity for fraudulent behavior, which can go undetected for a long period of time.

Types of Expense Reimbursement Fraud

Expense reimbursement fraud can be broken down into four categories:

• Mischaracterized Expenses – Employee submits expenses that do not qualify for reimbursement under company policies or claims personal expenses as business ones.
• Overstated Expenses – Employee requests reimbursement in excess of actual cost, typically through manipulation of records.
• Fictitious Expenses – Employee submits expenses for reimbursement that were not incurred.
• Multiple Reimbursements – Employee submits the same expense for reimbursement multiple times. He/she may also submit for reimbursement the same expense already reimbursed by an external organization or by seeking another proof for same payment.

Prevention and Detection

Having strong internal controls and a formal reimbursement policy with detailed guidelines and well-defined employee roles and responsibilities can greatly reduce fraud risk. Small businesses can especially benefit from formalizing their policies and roles, because many of them have no policies or inadequate policies and controls in place.

The following internal controls and preventive measures can help detect and prevent expense reimbursement fraud:

Initiate a formal review process at more than one level, and ensure all supervisors are aware of the company’s policy. Ensure that employees’ supervisors review and approve all expense reports prior to payment. The same individual should not be responsible for payment. Establish a policy for approving executive management expense reports. Some companies require approval by a board member. Maintain a travel reimbursement policy or guidelines. Require detailed receipts, including documentation of the expenses’ business purpose. Require meal and entertainment receipts include the number and names of attendees. Use standard daily per diem rates for meals and incidental expenses. Compare the dates expenses were incurred with employees’ work schedules. Attach conference schedules to expense reports, as applicable. Establish budgets for travel and entertainment expenses by person and level, and perform budget-to-actual reviews of travel and entertainment expenses for each employee at least quarterly. Verify mileage appropriateness via online maps. Maintain corporate cards if possible and regularly monitor the statements. Maintain random or monthly audits of expense reports. Use disciplinary action for offenders.

Expense report fraud is often difficult to identify because separating human error from deliberate fraud is tough to detect, and this fraud can also be perpetrated by nearly every employee at a company. Following the aforementioned strategies can be a major deterrent to employees contemplating reimbursement fraud.