May 18, 2017 Chris Doxey
Controllers and CFOs know that travel and entertainment (T&E) is one of the largest expense categories in their organization. So it should not be news, then, that T&E is often a target for fraud.
Today’s T&E solutions provide tools that analyze spending trends and can identify payment fraud. An expense management service and the mandatory use of a corporate credit card can spot potential fraud before significant damage is done. Plus a widely communicated travel and entertainment policy and internal controls program establishes the foundation for fraud prevention.
Old frauds with new faces
Be aware of these travel and entertainment fraud schemes:
- Claiming expenses just below the minimum for which receipts are required. A receipt may be required for all expenses over $25.00. As a result, an employee may submit phony T&E expenses for amounts just below the $25.00 limit that can be blatantly obvious such as $24.95.
- Falsifying automobile mileage expenses. Since receipts aren't required for using an employee’s car for business purposes, the accuracy of these claims is difficult to audit.
Anecdote: An employee was supplementing his income during a salary increase freeze by claiming mileage reimbursement for trips to the same location every week. The amounts submitted every week were the same. When investigated, auditors found that the employee had never left the building. In this case, the employee was forging his manager’s signature on the expense form used in a manual process.
- Claiming for “out of policy” expenses. A dishonest employee may test the waters by submitting a receipt for a personal expense incurred during a business trip. If the expense claim form is complicated, the processor can easily overlook and reimburse an improper expense. This issue occurs most often in a manual T&E process.
- Accepting unauthorized gifts. Some companies may be unknowingly receiving kickbacks from vendors seeking to win business. Examples are sporting events, lavish meals, memberships to country clubs, and stays at fancy resorts. Some companies have a “no gift” policy but need to have controls in place to monitor adherence to this strict policy.
- Manipulating currency exchange rates. Employees who travel internationally may intentionally use an incorrect or inflated currency rate when calculating their expenses in dollars within a manual process.
- Internal abuse of weak anti-fraud controls. Improperly established segregation of duties policies applying to processing claims can enable processors to falsify expense submissions by changing amounts or payees.
- Using multiple methods of expense submission. Some dishonest employees have exploited control weaknesses in travel and entertainment, procurement card, and AP processes by submitting the same expense numerous times, posing one or more times as a legitimate employee and at others as a supplier.
- Making “honest” mistakes. The best example of this situation is the individual who always makes mistakes on their expense submission because “the spreadsheet or system didn’t work properly.”
Taming the T&E monster
We’ve included examples countless varieties of ways that employees (and collusive outsiders) abuse their employer's travel and entertainment policies and processing systems to steal money.
And, while even the best system of internal controls can’t completely protect the organization against travel and entertainment cheaters, there are expense management measures that should be implemented to at least minimize the risk.
- Create and enforce clear policies on entertainment expenditures and thoroughly detailing the types and amounts of permissible expenses. Your policy should include procedures to be followed for obtaining authorization to exceed the limits allowed.
- Require all major expenses (air, hotel, etc.) to be accompanied by original receipts only. No photocopies or scanned receipts for reimbursement.
- Tighten expense report review procedures to ensure that all items and amounts are reasonable. To reduce this risk, it is effective to have a second reviewer scrutinize expense report data through an automated delegation of authority process.
- Cross-check all dates of items submitted with the dates of the employee's business travel to make sure they correspond. If two or more employees are traveling together, cross-check their expense reports against each other to see if each traveler is claiming reimbursements for a shared rental car, taxi, or mileage.
- Review two or three expense reports submitted by the same employee to make sure the same items were not claimed on multiple reports using different types of documentation. Conduct random audits to scrutinize T&E expenses in detail. Make sure all employees know about the occurrence of random audits.
- Review T&E expense patterns. Individuals may submit higher expense vouchers during certain times of the month, or they may submit expense vouchers for the same amounts.
- Institute a delegation of authority policy. This is used to identify the appropriate approval level for specific types of expenses. Large expenses such as overseas business trips should require approval by higher-level managers than those for routine client lunches or local trips.
- Ensure that your segregation of duties policies and procedures clearly define the roles of each employee within the T&E processing cycle. Policies should also identify the system access rights of each processor and are important for both automated services and manual processes.
- Implement continuous controls monitoring (CCM) to ensure that the same expenses are not submitted on a procurement card, T&E submission, and supplier invoice. CCM is accomplished only with an automated T&E solution and should be used in conjunction with analytics to spot trends and anomalies efficiently.
The internal controls or audit team should be responsible for developing and conducting independent tests of all approval procedures. Do these tests quarterly, at the minimum. Not only will these testing procedures expose possible weaknesses in your approval processes, the knowledge by traveling employees that such audits are conducted acts as a deterrent to cheating by sending the message that the company is serious about keeping its travel and entertainment expenses legitimate. Lastly, linking these policies with ethics training will help keep fraud under control.