Expenses Fraud may not be as big as other forms of occupational fraud but nonetheless it’s a soft target and considerable damage could be done, at short periods, if not nipped in the bud. According to a report by ACFE, a typical organisation loses about 5% of its revenues to occupational fraud and 15% of that is tied to expenses fraud. This is not an exhaustive list but should give you a gist of common expenses fraud themes to look out for during your analysis or audit.
- One of the common and prevalent forms of expenses fraud is requesting reimbursement for a personal expense by claiming that the expense is business related (eg personal travel as business trip, meals with friends as ‘business development’ etc).
- Fictitious taxi receipts are a favourite thanks to the generous hand out of blank receipts by taxi operators; as it goes undetected even by the best of systems, it’s like money in the bank.
- Claiming the expenses of others (eg meal receipt paid by another party is used to claim as paid by self) and overstating the cost of actual legitimate expense is also quite common.
- Requesting reimbursement for falsified or exaggerated mileage claims (eg claiming passengers on board when there were none and in some cases claiming mileage when public transport was used instead). This type of fraud can be frequently noted among employees working in shifts.
- Buy a cheap air fare at lower price. Buy an expensive flexible air fare and immediately cancel it. Use the expensive booking to claim but fly using the cheaper air fare bought earlier.
- Falsified expenses are approved by the same person forging the signature of the approver or compromising the system controls to approve own expenses. In some cases employees and Accounts personnel work together to overstate expenses and split the proceeds once it’s put into the system undetected.
- Wholly fictitious claim by inventing bogus receipts. With receipts easy to print off a home printer, it doesn’t take much effort to create fictitious claims.
- Using personal credit card for business expenditure (eg buying IT equipment, phones etc). The credit card bill is shown as proof of purchase along with the receipt. The goods can be returned back for a full refund back to their credit card which only gets reflected in their next billing cycle. The same can be done wherein offenders use personal cheques and then make a stop payment later. It is difficult to detect such cases purely by data analysis, unless the offence is repeated over several months for the system to learn.
- Multiple reimbursements – Submitting single expense several times at difference time periods (eg an employee can submit separate expense claims, one for airline issued receipt and the other for travel agency invoice, for the same business trip. The employee would normally submit two claims and assign two difference people to approve reducing suspicion and detection. In cases where original receipts are not mandatory, offenders submit the same claim (photocopy) in several expense cycles.
Certain fraud types such as overstating expenses in small claims (eg taxi bills) are extremely hard to detect. Forensic techniques can help but costs will far outweigh the benefits (this could act as deterrence at best). Only in repeat offenders data analysis can be effective as a pattern will soon emerge linking similar forged or overstated claims.
Bogus receipts (printed off using a home printer) can be detected by cross checking VAT, business registration numbers or company names with Registrar of Companies or Dun and Bradstreet business database for validity (a time consuming and expensive exercise).
Falsified expenses or collusion can be detected by analysing approved claims and actual paid and tracing it back to the Accounts personnel who finally processed the inflated claim. However, this could be difficult if majority of the processes are manual in which case the trail can be forged as well.
As long as there is an opportunity, people will take advantage, rationalising their act as normal without realising an offence is being committed. In majority of the cases streamlining the expenses approval process with strong policies, automating claims and settlements, using approved travel agents to make travel arrangements, using approved list of hotels and getting statements directly from vendors can help reduce expenses fraud considerably.
Tools such as Excel can be used to analyse claims and trends to get a general view of the problem at hand. Sophisticated Analytical techniques can then be adopted to systematically detect and prevent more serious cases. According to ACFE, occupational frauds are likely to be detected through tips rather than any other means, so having proper controls and automation can go a long way to nip expenses fraud in the bud.