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How to spot and stop expense account cheating

Suppose that one of your clients recently caught an employee falsifying an expense report. The client fired the individual, but because the fraudulent amount was relatively small, the business decided not to prosecute. As far as your client is concerned, the case is closed.

Unfortunately, the same conditions that make it possible for one employee to cheat may enable others to submit false expense reports. And even small amounts can add up to big losses when several employees and multiple reports are involved.

Employee ingenuity

There are as many ways to cheat on an expense account as there are employees willing to cheat. One of the most common methods is to mis-char­acterize expenses is using legitimate receipts for non-business-related activities. If Sarah treats her friend Jennifer to a birthday dinner, for example, that generates an actual receipt, but it shouldn’t show up on Sarah’s expense account.

Requesting multiple reimbursements is riskier, but just as simple. If Sarah wants her company to pay for Jennifer’s birthday dinner twice, she copies the receipt and turns it in on another expense report. Worse, she may attempt to be paid once for the bill, once for the receipt and once for the credit card statement.

Some employees simply overstate their expenses by doctoring supporting paperwork for example, by changing a 3 to an 8 or a 1 to a 4 on a receipt. Then, there are cheats who invent expenses. All David needs to do is ask a cab driver for an extra receipt, fill it out and turn it in for reimbursement.

These and other small expense account infractions can add up to outrageous sums. In one case, a top salesperson that traveled extensively for business was found to have defrauded his company of $30,000 over the course of three years by adopting a liberal definition of allowable business expenses.

Enforcement is key

In most cases, expense account fraud can be averted if companies implement fraud control policies and procedures and then enforce them. Too often, companies establish policies but fail to make sure they’re followed correctly.

Once a company has an expense report policy in place, it should communicate it. Sarah needs to know she can’t take friends to dinner on the company dime and David needs to understand that only business-related cab trips are reimbursable. This prevents misunderstandings and makes punishing infractions, when they occur, easier.

Also, managers should keep abreast of employee business travel plans and other activities that might trigger expense reports. If Doug is based in Cleveland but submits a bill for a dinner in San Diego, his supervisor should have known about the trip before it happened. The supervisor should review every expense turned in, and require original receipts for everything. If a photocopied receipt is necessary and sometimes it is, the supervisor should inspect it carefully for signs of tampering.

Some employees overstate their expenses by doctoring supporting paperwork.

While expense tracking software can’t substitute for hands-on expense account reviews, it can help spot inconsistencies that develop over time. These programs make it easy to see if someone’s expenses have soared in recent months or are noticeably higher than those of others in the same department.

A confidential fraud-reporting hotline is also a good idea. It encourages anonymous reports of misdoings and signals that the company is serious about eliminating fraud.

Be reasonable

At the same time, businesses need to take care that their antifraud policies are reasonable. If the official definition of reimbursable expenses is excessively narrow, some employees may be more inclined to lie on their expense accounts to make up for out-of-pocket expenditures.

Also, everyone in an organization must be held to the same standards. The CEO can’t be immune from scrutiny — especially because a CEO who cheats on an expense account may be perpetrating other forms of fraud, including falsifying financial records.

Systemic problems

If a business contacts you about suspected expense account cheating, help the client understand that the incident may not be isolated. Enlist a fraud expert to investigate the claim and possibly to review the company’s expense reporting policies and internal controls.

This article was written and published by Dennis Frankeberger, CPA/CFF, CFE 909-597-1100.

The Partners of Frankeberger Vausher + Company, CPAs and Litigation Consultants, have in excess of 35 years professional litigation and expert witness experience. We consult with clients, their attorneys and or accountants on the matters listed above in support of confrontational issues requiring settlement and or potential equitable adjustments. We have the technical expertise to analyze complex situations, assist with discovery, and render independent, professional opinions.

Frankeberger Vausher + Company includes CPAs, Forensic Accountants, Certified Fraud Examiners, and includes an expert with a Master’s Degree in Taxation. Dennis Frankeberger – Managing Partner, is also the Chairman of the Board of Advisors to The Leventhal School of Accounting at the University of Southern California. He has lectured extensively regarding matters of Internal Control, Discovery, Fraud, Ethics and Taxation.

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