Traveling in High Style on the Organization's Dime, Part 3

As we covered in parts one and two, travel fraud is one of the most common fictitious expense schemes I have encountered during my career. Instead of overstating actual business expenses, these unscrupulous employees invent travel activities and submit false expense reports to obtain unauthorized funds for personal benefit.

Many small travel-fraud cases are never prosecuted, especially when the perpetrator already has reimbursed the organization for the amount of the loss. This is disappointing, but understandable, because prosecutors have criminal case priorities designed to protect the public from perpetrators of more serious crimes.

We will wrap up our study of travel fraud in this column.

DIRECT BILLING OF TRAVEL EXPENSES BY HOTELS AND VENDORS  

Travelers often request reimbursement for hotel expenses they did not incur. These include individual travel expenses the hotel either directly bills to organizations or charges to another vendor account, based on prior authorization. In the early-morning hours, hotels often slide copies of room charges under the doors of guests due to check out that day. Or travelers may simply ask desk clerks for duplicate copies of their hotel charges. Either way, employees often use these documents to file for reimbursement of fictitious hotel expenses.

Once an individual checks out, the hotel directly bills the traveler's organization or charges the individual's expenses to a specific vendor account designated to pay the travel expenses for all individuals who stayed at the hotel for the same purpose or event. The vendor pays the hotel bill for everyone and then submits all expenses to the traveler's organization for reimbursement. Travelers then obtain duplicate reimbursement by simply claiming hotel expenses on their travel vouchers when they did not actually pay for them.

If companies allow hotels or vendors to directly bill them for employee travel expenses, they should establish procedures to ensure that these invoices are compared to employee travel vouchers to prevent duplication and other unauthorized expenses, such as personal vacation days at the same facility. Because invoices from these sources may be delayed for up to a month, managers should review the individual's travel voucher and the direct-billing documents together before making final travel payments. This may require the organization to set up a suspense file in the accounts payable department when multiple employees participate in the same event.

Case No. 1: A Heavy Problem for the Light Division
Glen was the principal mechanical engineer for the city's light division, for which he oversaw a project to construct hydroelectric capabilities at an area dam. As the No. 3 in command in the light division, he was both the project officer and the project manager, which constituted a major weakness in segregation of duties. Usually a project officer reports to a project manager, who then reviews project expenses and results. Also, no one supervised Glen's work because of his high-level position in the organization, which made things even worse.

Other key managers in the organization considered Glen's job performance to be poor, and some employees reported his frequent absences from the workplace during normal work hours. When two key managers confronted Glen about his absences, he pointed out that he worked a lot of overtime and could take compensatory time off.

However, the organization did not have a compensatory time policy, and there were no payroll records to support Glen's contentions. The light division was dissatisfied with Glen's response and commenced an internal investigation into the dam project's financial activities. The investigation revealed a wealth of new information about this high-level employee.

A federal regulatory agency supervised the funding of the dam project, so Glen — along with a few city employees and a project consultant — made periodic trips to Washington, D.C., to coordinate their efforts. Glen had convinced the consultant to pay the travel expenses for everyone on these trips and then bill the city at the completion of each trip. Accordingly, the consultant billed Glen's hotel expenses to the light division along with other normal monthly charges for their work on the project. Because Glen was the project officer, he actually approved his own travel expenses. And, because there was no project manager to oversee all activities, no one else reviewed these expenses.

Glen obtained duplicate copies of his room charges from the hotel and filed them for reimbursement on his travel vouchers. Using this method, Glen filed for reimbursement of $4,093.93 in fictitious hotel expenses for 10 trips during a two-and-a-half-year period on this project. Also, the consultant added a 5 percent management fee for all of his travel expenses billed to the city in this manner, which made matters worse.

Glen also filed for reimbursement of $1,029.73 in false vicinity travel during this time. When he was on site in Washington, D.C., he would file vicinity travel vouchers indicating that he drove his personal automobile back and forth between his duty station and other cities in the state. Because airline travel and hotel documents proved that he was out of town on these vicinity travel dates, it was obvious that the vicinity travel vouchers were completely fictitious.

In addition, Glen filed for reimbursement of $517 for 15 additional instances of false vicinity travel during this same time period. The light division's investigation proved that he never visited the officials in the cities reported on his vicinity travel vouchers.

The light division fired Glen at the conclusion of its investigation. He stated: "I don't really see myself challenging the facts of the case." The only defense he offered was that he had an alcohol problem. He made restitution to the city for the $5,640.66 in false travel claims, plus the audit costs for the investigation. The county prosecutor declined to criminally prosecute the case because the city's light division had been made whole.

PER DIEM BASIS VERSUS ACTUAL EXPENSE BASIS  

All organizations should consider the amount of time it takes their staffs to review and audit employee travel vouchers when establishing policies and procedures for employee travel expenses. Reimbursement of meals on a per diem basis rather than on an actual expense basis is not only easier and more economical to administer and audit, but it also improves employee morale.
If employees are entitled to payment for a meal while traveling on business, they should receive a standard amount for each of the three meals during the day. If they exceed the authorized allowance, it is automatically a personal expense. And, if they choose to spend less than the authorized allowance, they have additional funds to spend on those items that the organization cannot or will not reimburse (i.e., laundry, newspapers, toiletry items).

Using actual expense procedures for meals encourages employees to cheat by inflating the amount of the actual expenses to conceal the costs of these unreimbursed items on their travel vouchers. I believe organizations should adopt the federal per diem rate system. The organization should always require a receipt for any hotel used by an employee during official business trips. Finally, there is no substitute for a strong review and audit process for all employee travel claims.

SYSTEMIC TRAVEL FRAUD  

Sometimes travel fraud is systemic and results in significant losses to the organization, such as this case.

Case No. 2: Rampant Padding
As discussed in the March/April 2010 column, 28 officials from an eastern U.S. railroad and motor carrier company misappropriated $43,000 from their employer in less than three years. The wayward individuals included sales representatives, district sales managers, regional managers, area vice presidents, the vice president of sales and the executive vice president of sales — all non-union, salaried employees each making more than $50,000 a year.

These employees padded their meal and travel expense vouchers in numerous ways. One employee charged family meals at an expensive restaurant to the organization. Another employee grabbed a handful of blank receipts from a restaurant (he told investigators that he had found a "pot of gold") and gave them to anyone in the department who needed forms to submit expenses for meals. Employees also used both the originals and carbon copies of restaurant receipt forms to obtain duplicate reimbursements for the same meal. When these employees used credit cards to pay for their meals, these additional receipts often garnered a third reimbursement.

The company's internal auditors confirmed actual expenses for these travelers with credit card companies, hotels, restaurants and other vendors during a routine travel audit and documented abuses over a two-year period. Employees even altered duplicate copies of receipts by changing either the document number or the amount; they changed ones to fours and sevens and added numerals in front of existing amounts (such as $43.50 to $143.50). Employees also altered receipts by cutting off business names or logos from documents to conceal irregularities.

These employees charged their company for the normal coach fares for airline travel, obtained refunds on the tickets, purchased different excursions or super-saver tickets for the trip and then pocketed the difference. They also charged their company for the normal coach fares for airline travel and then did not travel. They then kept the refunds on the tickets.

The company did not prosecute any of the employees who filed false travel vouchers in this case, which was bad judgment in my view. Fourteen individuals resigned, but the company returned 13 of them to their original positions because management felt that resignations or dismissals would adversely affect sales and customer relations. The company gave these employees official reprimands and told them they would be fired for any future incident. The company did not reinstate one employee because of a previous travel expense abuse.

The results of this case conveyed to other employees that the company would not penalize them if they cheated on their travel vouchers (unless, of course, they were caught cheating more than once).

LESSONS LEARNED  

Let us review some of the finer points of fraud detection from these travel fraud schemes. Each one is an example of employees who submit false or altered supporting documents to their employers to obtain reimbursement for unauthorized or fictitious transactions.

• Organizations that allow hotels or vendors to directly bill them for employee travel expenses should establish procedures to ensure they compare these invoices to the employees' travel vouchers at the same time to preclude paying duplicate expenses.
• All organizations should consider the amount of time required to review and audit employee travel vouchers when establishing their policies and procedures to reimburse employee travel expenses. It may be best to use a travel per diem system rather than pay for the employees' actual expenses for meals.
• There is no substitute for a strong review and audit process for all employee travel claims.

GIVING CREDIT WHERE CREDIT IS NOT DUE  

The next column begins a three-part series on using an organization's credit to commit fraud. Stay tuned for more excitement about credit cards and business charge accounts!

Regent Emeritus Joseph R. Dervaes, CFE, CIA, ACFE Fellow, is retired after more than 42 years of government service. He is the president of the ACFE's Pacific Northwest Chapter.  

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