Tell us if this sounds familiar. An employee submits their expense report for a recent business trip. Before you reimburse them for lodging, meals, and transportation, you notice something not quite right.
You spot that one of the client dinner expenses considerably exceeds the average price range of the area. You’re unsure if the expense is inflated or not—unsure if there’s something more to it.
If you’ve found yourself in a similar position, you’re not alone.
Expense reimbursement fraud constitutes 14.5% of all occupational fraud. Whether it's inflated trip expenses or mischaracterized personal purchases, it can have disastrous consequences for your business.
In this article, we guide you through this type of workplace fraud as well as how to prevent it, and then finish off with a real-life example.
What is Expense Reimbursement Fraud?
According to The Association of Certified Fraud Examiners (ACFE), expense reimbursement fraud is a “scheme in which an employee claims reimbursement of fictitious or inflated business expenses.”
It occurs when an employee deliberately attempts to misrepresent, manipulate, and report false expenses to gain a monetary advantage. For example, they might present a personal purchase as a business expense they incurred on their company trip.
So, just how harmful are these fraudulent claims to your organization? Let’s take a look.
How Much Does Expense Fraud Cost Your Organization?
Businesses might overlook potential cases of this type of fraud because the expenses seem trivial. A slightly inflated high-end dinner here and a personal item there don’t seem to impact your organization’s bottom line—until it all adds up.
According to The ACFE’s’ 2022 Report to the Nations, the average cost of this workplace fraud amounts to $1,783,000 per case.
The report also states that employees get away with this activity for 18 months on average before it is detected. This makes it one of the longest-lasting types of fraud, as opposed to other forms such as toll fraud. It also indicates that unless inflated and fictitious expenses are honest mistakes, the employee has probably been committing fraud for a while.
Of course, the exact cost will differ from business to business.
Here’s how to calculate it:
- Find the total amount your organization reimburses annually.
- Estimate the percentage of reports you’ve detected to be fraudulent.
- Multiply these two numbers to calculate your potential fraud cost.
For example, let’s say your business reimburses $1,000,000 annually. If you’ve estimated 5% of these reimbursements to be fraudulent, then you’re looking at an estimated annual expense reimbursement fraud cost of $50,000. That’s a lot of money for a few personal purchases and fancy dinners. And it doesn’t stop there—there’s more than one type of expense reimbursement fraud…
What are the Types of Expense Reimbursement Fraud?
Expense reimbursement fraud takes four main forms, according to the ACFEs. This type of fraud can look like:
1. Mischaracterized Expenses
This occurs when employees submit an expense report that disguises their personal purchases as legitimate business expenses. It’s a type of fraud that can be easy to identify, especially when an employee files a report for events, electronics, or goods unrelated to their work responsibilities.
However, other forms can be more difficult to spot. For example, an employee returning from a business trip may have paid for a luxury hotel suite rather than a standard room.
2. Fictitious Expenses
Fictitious expenses occur when employees file for a purchase they never made. From fabricating a transaction with fake receipts to making up business activities, it’s one of the most deliberate forms of expense fraud.
Although rare, consequences for fictitious expenses can be high for both the employee and the organization. Identified during tax audits, it can result in a hefty fine for your company. Employees typically face termination and legal charges.
3. Overstated Expenses
Overstated expenses are reimbursement claims that exceed the actual cost of a product or service an employee has purchased. In these instances, employees will report their expenses higher than they actually are, often with the hopes of pocketing the difference.
Typically, these are small expenses, such as a $15 meal being reported as $25. While not costly at first glance, these expenses can quickly add up, especially if your employees believe they can repeatedly get away with them. However, overstated expenses can also stem from genuine human error and are often unintentional. Use your best judgment and remember: once is likely a mistake, 15 times definitely isn’t.
4. Multiple Reimbursements
This refers to the act of submitting the same reimbursement claim more than once. Employees might wait weeks or months before submitting the duplicate claim or even bring it to another expense approver. This is yet another form of expense reimbursement fraud that can be an honest mistake, especially with longer and more complicated reports.
When examining multiple reimbursements, look into the employee’s records. Have they submitted duplicates after long delays and rejections from different approvers? If so, you might be dealing with attempted fraud.
How to Identify and Prevent Expense Reimbursement Fraud
Expense reimbursement frauds can cost your company thousands of dollars, strain your resources, and erode trust. That makes it important to identify fraudulent claims before the impact culminates in irreparable damage.
Here are five ways to help you catch expense fraud in its tracks and prevent it from happening in the future.
1. Establish Clear Expense Policies and Guidelines
Start by creating a clear expense policy to minimize errors and deter employees from making any fraudulent claims. Within your policy, clearly outline what constitutes legitimate business expenses, documentation, and the submission process. Be sure to also clearly communicate the consequences of employee fraud such as both disciplinary and legal action.
Employees who are intending to commit fraud (or already committing it) will think twice once you’ve communicated the rules and consequences. A clear expense policy also makes it easy for your finance team to swiftly identify fraud if it does appear.
2. Verify Suspicious Claims
Before you reimburse your employees, look over their claims for any tell-tale signs of potential fraud, such as:
- Excessively high costs: Claims unusually higher than average for similar expenses, like hotel stays and meals, can be an indication of overstated expenses fraud.
- Rounded numbers: Claims consistently rounded to the nearest dollar or higher frequently indicate an overstated expense.
- Altered or illegible receipts: Receipts that appear to be tampered with, or have unclear dates, amounts, and details, are potentially fabricated or manipulated. While this can sometimes be a genuine error, it can also signify deliberate fraud.
- Duplicate expenses: Look for the same or similar expenses appearing multiple times within a short period or even the same reimbursement claim. An example would be two different receipts for hotel stays during a single business trip.
After identifying a potentially fraudulent claim, it’s time to investigate the matter. You can further verify suspicious expenses with the following strategies:
- Compare claims with business calendars and schedules: If an employee is claiming expenses for a specific meeting or event, cross-check their report with meeting minutes, attendance logs, or conference registration for confirmation. Look for any discrepancies between expense report travel dates and actual trip dates in your business calendar.
- Check transaction locations: If your employee just got back from a business trip, check if transaction locations line up with their itinerary. For example, a receipt might indicate a transaction occurred in one city, while the itinerary shows that the employee should have been in another.
- Verify receipts with vendors: Identified an altered receipt? Contact the vendor directly and verify the transaction details. Ask for the date, amount, purchased items, and payment method. Then, compare the information with the expense claim submitted by the employee.
Even if you pay special attention to most claims, instances of fraud can still slip by. That’s why conducting an audit can help deter employees from committing fraud in the first place, and help you catch them if they do.
3. Conduct Regular Audits
Regular audits ensure expense reports comply with your company’s policy and guidelines. If employees know you’ll be reviewing expense reports at random to find fraud, they’ll be less likely to attempt it.
Conduct monthly or quarterly spot checks with a random amount of expense claims depending on the size of your organization and amount of reports. For example, a company with a large amount of employees and lots of regular expense claims will benefit from more frequent spot checks. We also recommend paying special attention to high-risk reports from employees who consistently claim high expenses or travel with your company frequently.
Finally, make sure to document any findings, suspicions, and verifications that result from audits. Doing so not only helps find patterns but also provides you with evidence if you need to take investigations further if necessary.
4. Foster a Culture of Integrity
Your company culture also plays a vital role in preventing expense reimbursement fraud. When employees understand the importance of integrity and honesty, and see these values demonstrated by leadership, they’re more likely to adhere to ethical practices.
This includes senior management being transparent about their own expense reporting and openly discussing the importance of integrity in the workplace. Likewise, companies can introduce mandatory ethics training with an emphasis on expense reimbursement policies, accurate reporting, and the consequences of deliberate fraud.
5. Implement Finance Management Tools
Expense reimbursement fraud eats up your company’s resources—but so does investigating every single reimbursement claim that ends up on your desk. Instead of investing large amounts of time and effort in manually checking reimbursement reports, certain spend management tools can automate the job for you.
These tools automatically track, manage, and flag suspicious claims with features like duplication detection, spending limit enforcement, and automated alerts, making it easy to identify fraud. They can be a huge asset to finance teams looking to cut down expense fraud reimbursement without having to invest all their time and energy into identifying it.
Expense Fraud Example: Pace Worldwide Defrauded for 1 Million Dollars
Expense reimbursement fraud doesn’t just take the form of high-end dinners, a few electronic goods purchases, or a night at an expensive hotel. Fraud schemes also happen on a much, much higher level, and can have a disastrous impact on companies. Take the real-life case of Paul and Sandra Dunham as an example.
In 2015, the pair pleaded guilty to one million dollars worth of fraud. In this scheme, the Dunhams used fraudulent expense claims to pay for multiple personal purchases.
For example, Paul Dunham reported that he spent $3,007 on meals for business meetings when, in fact, the money was spent on luxury bedding for his home in North Carolina. The pair also fraudulently reported expenses to Pace Europe Ltd that were already paid for by Pace Worldwide, obtaining duplicate reimbursements.
Stay On Top of Company Finances to Prevent Expense Fraud
Expense reimbursement fraud can cost your company thousands—even millions—of dollars. Besides being one of the most common types of occupational fraud, schemes can go undetected for long periods. This makes identifying inflated, fictitious, and duplicate purchases absolutely crucial for your company. To nip expense fraud in the bud, be sure to establish policies, verify claims, conduct audits, promote integrity, and use the right software management tools to monitor finances.
Above all, we recommend closely monitoring every aspect of your company’s finances to help identify any anomalies or unexpected increases that could signify fraud. With the methods we’ve outlined above, you can eliminate the fraudulent activity sapping your company of its resources, and create a stronger financial outlook.
