Traveling the World in Style on the Company's Nickel

Don't ignore travel and entertainment expense reporting records. Small infractions can add up to thousands in losses and lead to greater frauds.  

Everybody trusted "Ron." He had worked for the company for more than 25 years, was earning a six-figure salary, and was less than one year away from full medical retirement benefits. There was one slight problem: He liked to cheat on his travel and expense report.

Our department - Asset Protection and Recovery - noticed Ron's large cash reimbursements during a routine data mining exercise. We pulled a sample of some of his reports and found altered invoices. In our subsequent investigation, we discovered that in the previous four years alone, he had bilked the company for more than $100,000.

We found that Ron had falsified and altered receipts, claimed fictitious expenditures, double-claimed and inflated expenditures, claimed personal expenditures as business expenses, and failed to provide documentation.

As in many cases, Ron started out small, found some success, and became bolder. His busy supervisor had handfuls of expense reports and conducted occasional perfunctory reviews. Too bad - his oversight cost the company a bundle.

Companies spend little time reviewing travel expense and entertainment reporting (TER) records because of the insignificant value of each item. But small infractions can add up to thousands - and ultimately millions of dollars in large corporations - in TER fraud.

TER Risks and Costs

Despite a worldwide decrease in airplane travel, e-business and teleconferencing won't replace the need for face-to-face communication. Some employees always will take advantage of their companies' travel and entertainment coffers.

According to a survey in the May 1999 issue of Preventing Business Fraud, respondents ranked travel and entertainment fraud as the third greatest controllable cost in their organizations.

A company can become riddled with TER fraud and abuse if employees believe that the top executives consider it acceptable. Additionally, quite often TER fraud and abuse can be an indicator of much larger problems such as kickback schemes and serious conflicts of interest cases. As the old English saying reads, "In for a penny, in for a pound."

Who Commits Travel Expense Reporting Fraud?

A TER fraudster could be any employee who has a financial need and the ability, and can rationalize his or her behavior. I've investigated cases at all levels of organizations. Generally, the perpetrators are:

• valued, hard-working, unsupervised employees who are above suspicion;
• likely to be married;
• members of religious organizations;
• educated beyond high school;
• without arrest records;
• socially conforming; and
• acting alone in 70 percent of the cases.

If you find a blatant fraud and the suspect's supervisor consistently has approved the travel expense reports, then you have to wonder if the supervisor was in collusion with the suspect and if the organization possibly was negligent.

TER Fraud Methods

Though there are limitless variations, individuals generally commit TER fraud and abuse by:

• mischaracterizing expenses;
• overstating expenses;
• creating fictitious expenses; and
• asking for multiple reimbursements.

Mischaracterizing Expenses

Under this scenario an individual makes a claim for reimbursement or submits charges directly to the company for personal expenses. This sounds simple but this area quickly can become gray. While there are expenditures that clearly seem to be private in nature, sometimes they have legitimate purposes.

For example, at first glance, children's videos would appear to be private expenditures. But if a sales person can't get quality time with a customer because the customer's kids are interrupting a meeting then the videos could be a wise and profitable sales tool.

Other expenditures may appear to be related to business but are personal. A business dinner takes place at a nice restaurant on the birthday of a suspect's spouse but only two people attend or a purported customer of a suspect may be out of town on the date of the dinner in question.

Some clear examples of this type of TER fraud are:

• purchasing personal fuel on the company credit card and claiming it's for the company car;
• purchasing gifts and reporting them as customer gifts but giving them to friends and family instead; and
• claiming golf expenditures as business expenses when the claimant and the spouse were the only ones playing.

Overstating Expenses

Here an individual simply inflates the claimed expenses by adding or altering numbers on a legitimate receipt or claiming non-existent cash tips. Fraudsters often submit inflated mileage claims for reimbursement. I've worked on some cases in which the suspects had claimed so many hours of driving that they'd have no time to work or sleep because they'd always be behind the wheel. Other specific examples include:

• claiming per diems for five days when the trip lasts only three;
• requesting taxi drivers to complete receipts for significantly higher amounts than the actual fare; and
• asking hotels to increase the amount contained on the invoice.

Creating Fictitious Expenses

Very little gray area here. The fraudster requests reimbursement for an expense that simply never was incurred. The individual uses the cash for personal enrichment or for company business. This method is the overstated expenses scheme taken to a new level. The fraudster could be asking for reimbursement for fictitious university tuition, non-existent office supplies and equipment, or cash for meals that he never ate.

Asking for Multiple Reimbursements

This is the repeated claiming of the same expense. You need to be cautious of duplicate invoices provided as part of travel expense reports. Also, individuals sometimes will use statements and invoices to claim the same items multiple times. Examples include asking for airline tickets by submitting copies or requesting money back for a hotel bill that actually was paid with a company credit card.

Investigation Methods

If effective internal controls are in place, of course, you don't have to investigate; prevention is always better than detection.

But if you find TER fraud, determine if you want to conduct a full-blown investigation or one focusing on a few transactions. Also decide if the objectives of the investigation should include prosecution, fund recovery, and/or employee termination.

You'll initiate the investigation because of information discovered through data mining, breaches in internal control processes, or a complaint received from a supervisor, a coworker or someone outside the organization such as customer or spouse.

Evaluate the initial information and decide if there's sufficient evidence to launch a full-scale inquiry. If so, proceed with caution.

Confidentiality

A TER fraud investigation must not only be confidential but at times may need to be cloaked with attorney-client privilege because supervisors can disagree on what could be fraudulent. Consider these issues:

• The information you handle can cause damage to your organization and the individual being investigated.
• An investigation has the potential to damage your organization's relationships with your customers.
• Even though any type of fraud investigation can defame a suspect, the risk is higher in a TER case because of greater surveillance.

The Nitty Gritty

Careful, detailed documentation management is crucial in these investigations because of the massive amount of receipts and invoices. Obtain the suspect's expense reports from your company's records and supplement them with a spreadsheet containing all the transactions charged to the individual's credit card.

This electronic spreadsheet generally contains:

• date and day of the transaction and when it was posted;
• type of expenditure;
• MCC code (which identifies vendor types);
• vendor name;
• location of purchase by city, state, and country; and
• amount of purchase.

Check for the requisite documentation to support the transactions listed on the credit card records. Expand the spreadsheet to incorporate cash expenditures and cash reimbursement claims submitted by the individuals. Then run sorts and matches. Sort by days; Saturdays and Sundays are always revealing as are holidays. Sort by types of vendors and vendor codes (including gasoline charges) and select vendors for follow-up. Sort by weekday all charges paid for by both credit card and cash; I've found six meals a day claimed.

Look for these red flags:

• European invoices with American-style dating;
• sequential numbering of invoices;
• invoice alterations;
• illegitimate descriptions on invoices;
• non-matching country currency; and
• illegitimate or non-existent vendors.

Obtaining Information from Third Parties

When you're looking for corroborative evidence or verification of submitted expenses, ask yourself:

• Why am I calling and what do I want to know?
• How can I get this information with the least amount of disruption and resistance?
• What will I do with this information once I have it?
• What is the downside of getting this information? (Your inquiry could get back to your suspect.)

To leave all sources' doors open for further calls:

• Know what you want and be professional and courteous.
• Record your conversations in writing.
• Be prepared for follow-up questions and unexpected
  information.
• Know when to quit.

Fairness in Investigations

Don't use your personal standards to judge the expenses of another. Look at the expense reimbursement requests in the context of the person's position, background, and location. Realize the difference between abusive and fraudulent expenditures. One is a managerial issue and the other is a crime. (However, remember that abuse often leads to fraud.)

Let the facts speak for themselves and be reasonable. In a TER investigation, your success won't be remembered but your failures will.

To Prosecute or Not to Prosecute?

Consider doing the following when determining whether to prosecute.

• Complete a cost/benefit analysis using established prosecution guidelines.
• Use a standardized set of criteria for each case.
• Don't judge a case solely on the dollar amount of the fraud. Prosecuting frauds with small losses may preempt more serious crimes.
• Be fair across the board.

What Does Law Enforcement Want?

In your prosecution file, make sure each instance of TER fraud is documented and supported with a detailed factual summary, which will enable law enforcement to decide what action and charges, if any, they wish to pursue. Include a detailed loss assessment dividing the offenses into categories. If your file is prepared in a proper manner, the police ideally will interview the suspect and then simply provide the file and the suspect's statement to the prosecutor's office. (See "Wrap it Up: Packaging Your Case for Prosecution" on page 22. - ed.)

You'll have more difficulties enlisting suitable law enforcement in a foreign jurisdiction simply as a result of not being familiar with the environment. In any jurisdiction, the better the case file the more likely the subject will plead guilty. Therefore, the need for a quality file in a foreign jurisdiction is even more important. If you've been involved in a trial you know that a bit of work in the beginning can save an incredible amount of time at the end of the case. That's why a properly prepared file is so important. Remember that once you hand the file over you effectively lose control or ownership.

Withdrawing the case for any reason could be detrimental to any future case you give to law enforcement.

Once the case has gone to the police, check regularly to see if they need anything. To make your life easier, don't tell them what and when to do their job. As fraud examiners, we know that homicides and robberies will continue to take precedence over white-collar crime.

Ubiquitous and Insidious Beast

Travel expense report fraud may have wormed itself into every level of your organization. Some executives - who would never think of cooking the books or stealing petty cash - will fudge on their credit card charges. Conduct routine data mining on all employees who submit expense reports. You'll catch the unlikely fraudster and possibly deter a greater fraud.

Guido Van Drunen, CFE, is senior manager - asset protection and recovery for The Dow Chemical Company in Midland, Mich. Previously, he worked with the New Zealand Inland Revenue Department as the senior investigator in charge of the white-collar crime portfolio and as the national advisor of investigations. His e-mail address is: gvandrunen@dow.com.