Top Four Types of Expense Abuse and How to Prevent Them
February 23, 2021
Estimated Reading Time: 4 minutes
Trust between a business and its employees is fundamental to success, according to the Harvard Business Review.
The benefits of a high-trust environment are impressive, but is there a potential downside? As reported by the ACFE 17% of all business fraud occurs in-house, specifically through employee expense reimbursements. How then does one balance (and enjoy the benefit of) a trusting employer/employee environment while simultaneously protecting the firm from errant employee expenses? Let’s look at the most common types of expense fraud – and how automation can weed out the few bad apples, building confidence on both sides.
1. Bogus receipts
These records that are fictitious but appear genuine could be an expense involving a fake purchase. Maybe a business only covers the cost of eyeglasses in its benefits plan, but an employee claims sunglasses with a phony slip.
Meal-o-mania: Michael McIntyre, who formerly worked at Morgan Stanley was charged for allegedly fabricating USD $4,000 worth of restaurant receipts. In a period of two years, McIntyre reportedly forged about 27 restaurant receipts.
2. The price isn’t right
This type of fraud happens when the cost of a true expense is inflated before filing for reimbursement. For example, a $2 cab ride becomes a $20 one. If your business doesn’t require original documents, a photocopy of the receipt might be altered and submitted, which can be difficult to detect.
A $177 bagel?: A former New York City Councilman, Larry B. Seabrook made headlines for reportedly doctoring a USD $7 receipt for a bagel and soda to make it look like a USD $177 bill. Apparently, Seabrook tampered with his expenses and used other tricks to line his pockets.
3. Out of policy expenses
Organizations reimburse employees for expenses that are within the company policy, such as travel, lodging, and meals. In this scheme, someone might request reimbursement for an item or service that is non-business-related or outside the company policy. It’s usually hard to categorize a claim just by looking at the receipt which makes it difficult for accountants to spot a personal statement billed as a work expense.
Supreme ‘mis’judgement: Spain’s former chief justice of Supreme Court, Carlos Dívar, resigned after being accused of claiming vacations as a business expense. Investigations uncovered as many as 32 personal trips, some including beach resorts for which Dívar claimed about USD $35,000 in total.
4. Double dipping
A mischievous employee might try and seek reimbursement for an expense more than once. Sometimes, there are multiple records of a receipt, like an email and hard copy that serve as proof of purchase. Your AP team or a manager might end up approving duplicate claims without carefully reviewing the full details.
Duplicitous duo: Paul and Sandra Dunham were charged for defrauding their employer by USD $1 million over a period of seven years. The husband-wife duo obtained duplicate reimbursements for expenses that were already paid by the business, according to reports.
It can be easy to modify an original receipt before scanning or copying it, like changing the number 3 to 8.
Transforming expense management
Managing expenses isn’t the most enjoyable task. Who hasn’t found themselves with a ball of bunched up receipts in their bag at the end of a business trip? Meanwhile, the AP Team is forced to sift through stacks of hurriedly-stapled expense reports to make sure everything squares up; mistakes are bound to happen.
If a business wants better visibility in accounts payable, it needs tools that can help detect forgery that humans can’t. One of those tools is artificial intelligence, which takes care of time-consuming data entry, so that accountants can focus on quality work. For example, Beanworks’ SmartCapture feature is helping AP teams save time and reduce data entry errors by using AI to capture invoice details.
Save time with data entry and improve accuracy using Beanworks’ AI technology
To help prevent expense abuse and build up trust, both the employer and employee need a system that makes expense management easier and quick. Finance leaders are already looking at changes to accommodate better remote habits for their team. Here are a few practices that can help your business prevent fraud in expenses:
- Ask for original receipts: It can be easy to modify an original receipt before scanning or copying it, like changing the number 3 to 8. And catching those details on a duplicate copy can be tough. Mandating original receipts reduces this possibility.
- Give your employees better tools: Simplify the process for employees to submit expenses. With Beanworks, employees can take a picture of the receipt and submit it for approval. Managers can accept or decline the claim online or through the mobile app.
- Design dynamic approvals: Customize approvals based on a threshold like a dollar value. For example, any expense above $500 goes through a review by an additional approver. If you’re using a platform like Beanworks, you can curate approval channels based on department, budget, or expense type.
- Create a clear policy: Set a clear and fair expense policy—one that’s free of ambiguity. A well-written policy and an expense management system that flags irregularities can help limit expense fraud.
- Conduct routine audits: Look for anomalies in date, time, location, vendor etc. Most sham records will have hints of fraud, for example, an employee claiming a business lunch receipt for a date when they were on leave. It’s good practice to conduct surprise audits or cross-check details like calling the restaurant where the appointment was made.
Curious to see how automation can make expense management easier for you?
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Work-related travel and entertainment is back on the agenda, meaning that the time early in the pandemic when fewer expenses claims were filed is coming to an end. Businesses need to be ready to process expenses in a way that enables them to adjust to this new, agile working model.
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Filing expense reports aren't just dreadful for employees. They could be costing businesses a pretty hefty figure. Fraud and expense abuse by employees can cost companies up to 5% of their annual revenue.
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