When travel for business becomes fraudulent pleasure

Many organizations allow business-traveling employees to report certain expenses and receive reimbursement for these costs. Unfortunately, this can lead to expense reimbursement fraud. This fraud is a form of asset misappropriation in which an employee steals or misuses their organization’s resources. This scheme can consist of outright fabrication of expenses or inflation of actual expenses for things like airfare, lodging or gas mileage.

According to the 2016 ACFE Report to the Nations on Occupational Fraud and Abuse, expense reimbursement fraud caused an estimated median loss of $40,000 for companies. This type of fraud is rarely discovered immediately when it occurs — the median time to discovery is approximately 24 months.

Some examples of reimbursement fraud might include the following:

• Charging for items that were used for personal reasons, such as gas, groceries or hotel stays.
• Billing for travel expenses that never actually materialized, such as canceled flight tickets or convention registration fees.
• Seeking reimbursement for items that were never purchased.
• Collusion among multiple employees to bill separately for travel expenses, even though they traveled together.
• Falsification of receipts.
• Claiming travel and entertainment (T&E) expense reimbursements in excess of the allowed per diem amount or purchasing unapproved items like alcohol or sports tickets.
• Requesting reimbursement for tips greater than were actually given.
• Choosing more expensive options than necessary, such as flying first class instead of business class or renting a limousine instead of taking a cab.
• Falsely inflating gas mileage totals.

Without proper controls in place to prevent this kind of fraud, unscrupulous employees have open opportunities to potentially steal thousands of dollars. With T&E spending currently at $156 billion, according to JP Morgan, and the highest growth occurring among middle market companies, the potential for financial loss due to expense reimbursement fraud isn’t trivial. (See The Impact of Expense Reimbursement Fraud, by Raymond Roth III, Sept. 1, 2013, Stout.)

Despite the risk of losing tens of thousands of dollars to expense reimbursement fraud, many organizations don’t have systems in place to prevent it. Even using automated expense reporting software instead of manual reporting won’t prevent fraud. Instead, companies must look closely at expense reimbursements rather than trusting employees implicitly.

To illustrate what expense reimbursement fraud can look like and how it can be prevented by corporations worldwide, let’s look at two real-world case studies in which fraud not only occurred but was eventually discovered.

Case study No. 1: New accounting manager thwarts intimidating client partner

Jim, a client partner for a large multinational corporation, successfully built rapport with other executives during his 12 years at the firm. He traveled extensively and attended national conferences. The company’s policies required him to account for his expenses, so Jim regularly submitted large expense statements and reports.

The accounting department wouldn’t pursue irregularities on Jim’s travel and expense report because of his intimidating nature, his status within the firm and his rapport with top-level executives. However, everything changed when George, the new accounting manager — who knew nothing about Jim — came on board.

George asked Jim for additional supporting documents to justify some of his T&E expenses for meals, car mileage, air tickets, hotel accommodations and client entertainment. Jim never submitted any itemized bills and resorted to his usual intimidation tactics,  but George didn’t waver. George suspected fraud.

The finance department conducted a thorough probe, which revealed years of Jim’s fraudulent reimbursements. His claims included items such as personal travel expenses for him and his family, alcohol, fictitious gas receipts and bills for business travel that never happened. They also discovered that Jim made false claims for nonexistent client entertainment expenses.

Takeaways

This case, a clear example of expense reimbursement fraud committed by an employee who had been a part of an organization for years, provides evidence of personal expenses claims, fictitious claims and manipulated facts. Because Jim had worked at the organization for 12 years, he probably initiated the fraud a few days after he joined.

Jim’s false claims contributed towards inflated business expenses, which significantly affected the organization’s annual figures. He defrauded the company by exploiting weaknesses in the company’s internal controls — made possible by his executive authority.

This case underscores the importance of a robust and impartial system of expense report verification. Regardless of an employee’s status within an organization, they should be subject to the same scrutiny as anyone else.

Case study No. 2: Trusted VP of sales caught in his fictitiousness and inflation schemes

Sam was the vice president of sales at a multinational corporation. The company would reimburse him for his extensive travel expenses after he submitted his T&E reports. However, Sam was beginning to commit fraud. On one trip, for example, an accommodating account manager expensed $45,000 that Sam had taken as a travel advance.

The account manager was then transferred to another location, and a new account manager, Doris, noticed that Sam was claiming reimbursement for a gas mileage bill that dated back several months. Doris assumed that Sam had made an error in the dates, so she reviewed his past records and found that he’d made claims for three past trips for which he’d been reimbursed.

Doris then examined records from the previous six months and discovered that Sam had been regularly double dipping. He’d also presented expense reports with dates of public holidays and weekends. Sam included laundromat, taxi and tourist spot receipts, all of which he claimed under client entertainment expenses. Doris also noticed the advance amount that was expensed off without any valid documents.

The human resources manager investigated and found that Sam had committed an expense reimbursement fraud of $32,780 apart from the advance amount of $45,000. As usual, Sam denied the allegations. However, the incriminating evidence overpowered his denial. The top-level executives were shocked because they’d trusted Sam. Sam’s manager, because of his work and travel pressures, had neglected to question the veracity and reasonability of Sam’s expense claims.

Takeaways

This case provides clear evidence of two primary fraud schemes perpetrated by the employee: fictitious expenses and inflating business expenses. Sam had served at the organization for three years, which meant he probably initiated the fraud as soon as he joined the organization. Records from at least a year earlier prior to the discovery of the fraud revealed Sam’s fictitious travel-related claims. Again, this case study highlights the importance of thorough expense reporting and scrutiny.

How global companies are preventing expense reimbursement fraud

The case studies highlight the importance of taking careful measures to prevent reimbursement fraud. Implicit trust of employees, without checks and balances, enables them to get away with false expense reporting.

Many companies worldwide are implementing tighter controls and greater oversight over business expense reporting. Some of these measures include:

A clear-cut travel and expenses policy. Simply using common sense isn’t sufficient. When employees need to travel for business, a company needs to have a clear policy that applies to all employees regardless of their roles or status within the company.

Every organization’s management team should set up a committee to create stringent policies on appropriate travel reimbursements. This policy should guide managers and employees on the rules the organization will use to approve or deny each travel expense. The organization should inform all employees of its decisions and expectations and the possible punishments for not adhering to the policy.

Meaningful expense approvals. Employees can commit fraud when an organization unquestioningly approves expenses. An organization’s trust for its high-ranking employees doesn’t preclude scrutiny of their expenses for abnormalities. Many companies are investing in expense-reporting software, or software-as-a-service solution, rather than manually handling these processes. These software packages are designed to analyze all the electronic data entered. This automation can drastically improve the amount of control.

Ask for individual statements on corporate credit cards. Organizations have the authority to ask for individual statements and discover the nature of individual expenses and transactions. Use that authority, and monitor as many transactions as possible even when employees are on foreign trips and tours. Impose reasonable caps on expenditures under different heads.

Strict policy enforcement. If you give someone an inch, they might take a mile. Strictly deal with even minor infractions against expense reporting policies regardless of the amount of money. This vigilance sets the tone and creates a greater awareness that can deter future transgressions. Lax enforcement can easily result in a culture of non-compliance that legitimizes expense reimbursement fraud.

Perform internal and external audits. During annual audits, provide sample reimbursement statements to auditors to check the trail of expenditures. Keep the employees notified about the initiated procedure.

Management accountability. Managers in charge of expense report verification must be held accountable for failing to detect fraud. This accountability can encourage them to spend more time looking closely at expenses. Also, if employees are aware that everything they submit is being examined closely, they might be less likely to attempt to submit any fraudulent expenses.

Scrutiny not trust

Detecting and preventing expense reimbursement fraud begins with a willingness to take it seriously. In this column’s case studies, the offending employees took advantage of their company’s leadership trust. Robust measures weren’t in place to scrutinize expense reports.

Organizations must scrutinize all expense reports. Automated software solutions can reveal unusual activity.

Expense report fraud can be devastating for organizations. Don’t implicitly trust employees.

Sujatha Dwaraganath, CFE, is project lead for Tata Consultancy Services in India. Her email address is: vsujatha75@gmail.com.