Fraudulent T&E reports can indicate greater ethical lapses

In 2008, shortly after receiving my CFE credential, my boss emailed me asking to join her in a meeting with the company’s general counsel to discuss a travel and entertainment (T&E) matter. I was young and a newly minted CFE. I naturally felt terrified and nervous to be included in such a high-profile meeting at an early stage in my career. The general counsel told my boss and me that a member of upper management was potentially falsifying expense reports. This was my big chance to make a difference at my company to root out fraud but also make a name for myself.

The general counsel gave me a year’s worth of the manual expense reports and all the applicable receipts for each. I quickly noticed a trend that all the handwriting for the costs listed on taxi receipts matched the signature of the driver. Coincidentally, I also used the same taxi service when I traveled to the airport, and I remembered how the taxi driver, when dropping me off, would give me a handful of blank receipts for me to fill in.

Ultimately, I determined that the manager had forged the taxi receipts to the tune of a couple thousand dollars, but we didn’t identify anything further during the expense review. However, when I presented this information back to the general counsel, they decided this manager’s misdeeds were enough to tarnish their trust, and the company terminated the employee.

You might be asking why a company would fire a higher-level employee over some made-up taxi receipts? This step was crucial to ensure tone at the top and communicate that all individuals were expected to act ethically and with integrity at all times.

Reviewing T&E spending

T&E comprises significant amounts of annual spending in many organizations, including airfare, lodging and meals, among other line items. It’s an area that’s quite susceptible to fraud. Some companies don’t want their fraud investigations and/or internal audit teams looking into T&E fraud because they might be afraid of what they could find, or they feel their employees would never steal from them. But with trained fraud examiners and data analytics tools (Tableau, ACL and Excel, among others) most companies can isolate red flags from overall data to perform review of expenses.

Once management has given you the green light to review T&E spending, you need to establish procedures. Management might feel more comfortable with your proposed process if you establish clear and defined procedures for how you’ll identify red flags, what you’ll do once you find those red flags, who you’ll notify during the process and how you’ll ultimately discuss these with the suspected employee.

This defined process review also protects you, the investigations team and the internal audit team. You don’t want people within the company developing preconceived notions that the investigations and internal audit teams are predetermining who they want to review.

If you have a data analytics team at your disposal, this would be a great time to get them coordinated with your fraud examiners to begin creating rules that can flag potential anomalies within your T&E spending. You might want to run these rules by those within your established core investigations team (human resources, compliance, legal, internal audit, among others).

And if a core investigations team doesn’t exist, you might consider creating it so management knows exactly what you’re looking for within the data and can provide input. Also, establishment of the core investigations team helps ensure you don’t receive pushback from management when you do uncover issues within the data. You don’t want to get access to the data, run queries and find red flags and then have to explain to management what you plan to do with the identified employees. It’s better to communicate upfront to management what you’re doing, so you don’t have to hand them any surprises when you discover something.

Reviewing the data

The No. 1 key to success when you review data is ensuring levels of management are involved from the start and can provide necessary input and support to your review. Once you get access to the data, you’ll want to establish various tests to run against the data.

Be sure to flag:

• Spending that’s right below the receipt threshold (i.e., if you’re required to submit receipts for expenses above $25, isolate expenses at $24.99 or right below that).
• Expenses that are submitted as out of pocket (why isn’t the employee using their company card?).
• Expenses marked as personal.
• Air travel not within compliance of policy.
• Expense reports approved within a short time of submission.
• Expenses with MCC (Merchant Category Codes) related to political or charitable donations (These could help identify potential anti-corruption issues.)

Results of these tests don’t necessarily mean identified transactions are fraudulent. However, it begins to paint a picture of how an employee acts with their company credit card. For example, while it might be acceptable with your company’s T&E policy that employees can use their company credit card for personal purchases, you should consider two key factors:

1. Is the employee making the necessary payments to the credit card company to keep the card current?
2. Is the employee accurately marking personal transactions in the expense tool or are they passing personal expenses through as business expenses?

I’ve gone through reviews where I’ve identified employees who marked transactions as personal but never made payments to the credit card company. The employees were, in essence, running personal balances in excess of $5,000 on their company card for more than 18 months. The organizations never flagged these personal charges as past due because the employee continued to make new business charges and submit them for payment. It wasn’t until the team identified these personal expenses through testing red flags that it was able to perform a reconciliation of the employee’s account to identify the personal balances.

Data analytics also can plot employee spending by title and total amount for the period in review. With this tactic, you might uncover employees whom you wouldn’t expect to incur significant volumes of spending on their company card. For example, and depending on the nature of your organization, it might make sense for a vice president of sales to be one of your top card spenders but identifying administrative assistants in the top tier of spending might require some further review of that spending.

I’ve used this last example of plotting spending by title to swiftly identify instances of employees misusing their company credit cards. If not for company management allowing internal audit to review the T&E spending, these frauds most likely would’ve continued and could’ve caused the company serious damages.

When you review the results of the tests performed over the T&E data, some misuses of the company card will pop right out to you, and others might need review of additional data, such as receipts an employee provides, the employee’s company emails and social media.

An expense might appear to be related to business, but then you dig a little further and uncover fraudulent behavior. For example, business meals and entertainment are common practice for employees. However, it might not make sense if a significant portion of those expenses are conducted within a mile radius of the employee’s home.

When you identify red flags in an employee’s T&E you must dig deeper on the entire population (normally about two years of expense reimbursements). I had one case in which the expenses appeared to be legitimately related to business. But then I linked a majority of those expenses, marked as business, to personal pictures of events — such as celebrating their birthday party with friends — posted on the employee’s social media account.

Interview of employee

After you’ve performed a deep review of an employee’s expenses and found red flags, the second-to-last stage of the T&E review process is the interview. This is the part I enjoy most. You might spend weeks or months reviewing an employee’s transactions, receipts and emails, and now it’s time to sit in front of them and ask pointed questions to which you might already know the answers.

This isn’t an “I got you” moment — it’s a chance to see the three sides of the Fraud Triangle (pressure, opportunity, rationalization) appear as the employee tries to justify the expense.

I’ve learned it’s best to be courteous, but firm, when conducting these interviews. Try to hear their side of the story. You might start the interview thinking the employee is committing fraud, but you might leave knowing about a larger culture or company issue you didn’t know existed. This is also the time when you take all the data you’ve collected and ask the employee what transpired.

I’ve had T&E data interview processes in which I’ve taken more than an hour to get an employee to admit to their misdeeds. An employee once admitted to the fraud on my first question of “Do you know why we are here?” The employee felt comfortable admitting to the same fraud they’d committed at another company, but it never appeared on a background check because the previous employer never reported the crime to law enforcement.

Post-interview actions

As a CFE, the steps you and the company take following the interview are probably the most important because they set the ethical tone. These actions set a barometer for your fraud tolerance. Do you terminate the employee, make the employee pay the company back or do you provide the case details to law enforcement for prosecution? In the last example above, the employee felt that because their previous employer didn’t do anything to them they could continue doing the same thing to their next employer.

The steps you take in this final stage will not only affect your organization but also future organizations that employee might work for. In the ACFE’s 2020 Report to the Nations, 89% of perpetrators were never charged or convicted, and 41% of the occupational frauds in the study were never reported to law enforcement. In the previous four reports, “Fear of Bad Publicity” was the No. 1 reason organizations declined to refer cases to law enforcement, but this has moved to the No. 2 spot, while “Internal Discipline” rose drastically from 33% in 2018 to 46% in 2020.

I’ll leave you with this thought: Though internal discipline has risen, is it enough of a deterrent to keep that employee from performing the same nefarious deeds at another company?

Matt Molchany, CFE, is in a senior fraud role with a leading hospitality company. He’s president of the ACFE South Florida Chapter. Contact him at molchy66@gmail.com.