CFO’s Guide to Identify and Prevent Expense Fraud

What is expense fraud? 

One rotten apple can spoil the whole barrel, and one dishonest employee can bring the entire business down. 

Companies often see employees follow the devil’s pathway and engage in expense fraud. Employees deliberately inflate costs to get higher reimbursements or stealthily use company money allotted for an organizational function to buy personal effects. 

Sometimes, by the time the expense frauds surface, it is already too late, and the company has already lost more money than it could afford. Without strict mechanisms, there is no end in sight to these malicious schemes.  

According to a 2018 report by ACFE, 89% of occupational frauds were just asset misappropriation accounts. As businesses grow more aware of the various expense fraud shenanigans, the employees get more creative with their schemes. 

Let’s look at one real-life example of this-

In 2019, when the pandemic was just on the horizon and CFOs all over the world were under pressure to optimize processes and curtail costs, Mr. Ashish Kabra*, CFO of one of the largest automobile companies, commissioned an external audit. 

Can you guess how much amount they realized they had reimbursed against fraudulent claims? 

5 Crores 48 lacs and 10 thousand rupees. 

How was this possible? And more importantly, was there a way to curtail this? 

After all the approvals, validations, and policies, how could the officials not notice such a significant amount? 

Let’s find out with the help of this guide. 

Also, Read: 10 Common Types of Financial Frauds

Expense fraud – Complete identification and prevention guide

In this guide, we give you a toolkit that will help you hammer expense frauds out of your expense management system.

By the end of this guide, you will be familiar with these expense fraud prevention measures and techniques –

1. Frequent expense fraud categories: knowing exactly what most companies face when it comes to expense fraud.
2. The reason behind expense fraud: get inside the mind of the perpetrators and eradicate their motivations from the root.
3. What frauds do to an organization: so you know what to preserve if it ever comes to damage control.
4. Obvious signs of expense fraud: for early detection and intuitive fraud prevention actions.
5. How to identify expense frauds: 6 tips so you don’t miss anything.
6. How to prevent expense frauds: 9 steps that will help you shield your organization.

Types of expense frauds

Expense scams come in various forms, shapes, and sizes. The victim company can lose anything from a few bucks to lakhs of rupees. The finance team must understand the nature of all fraud categories and develop early detection strategies for all of them. 

Let’s look at the most common types of expense fraud.

1. Fictitious spends

These are the ghost expenses that come to haunt business managers at night. They are the stationery that was never bought and the client gifts that never reached the hands. Fake receipts and forged documentation often back fictitious expenses. Hence, it is easy to differentiate them from innocent human error. 

The most commonly occurring fictitious expenses are-

• Claiming reimbursement for free meals or drinks
• Claiming reimbursement for supplies that were never bought
• Producing fake receipts with the help of design software or by conspiring with vendors

2. Duplicate reimbursements or double billing

Duplicate reimbursement fraud is the act of filing the same expense receipt multiple times for reimbursement. This type of fraud is slightly challenging to differentiate from innocent human error. 

Double billing occurs when the employees obtain multiple bills for a single expense and file them under different costs. Maybe they asked for a digital and a hard copy, or two employees had a meal, and both filed the same receipt for reimbursement. 

Another type of duplication fraud is when the employee uses the company’s card to pay for an expense and then uses the receipt to file a reimbursement claim. 

In Mr, Khabra’s case, duplicate Bills – accounted for 6% of total expenses

• the Same bill was expensed by an employee multiple times.
• the Same bill expensed by 2 different employees 

This amounted to INR 22,680,000, and across 18,900 bills, 850 employees.

3. Mischaracterized personal expenses

Mischaracterization expense fraud occurs when employees file receipts for personal expenses for reimbursement. It is one of the easiest ways to commit expense fraud because it does not require the falsification of receipts or documents. 

4. Refunded Expenses

Refunded expenses fraud occurs when employees buy something, obtain the receipt, return it for a refund, and then file the receipt for reimbursement. One of the most common types of refunded expense fraud is filing for canceled/rescheduled flight tickets and hotel bookings. 

5. Inflated Expenses

Inflated expenses occur when employees overstate the price of legitimate spending. They can do so by stealthily adding small amounts to everyday expenses or opting for costly purchases when cheaper options are available. 

Mr. Kabra had commissioned an external audit on 3,15,000 bills, which were submitted by the 5000+ employees of the company in the last year. For him, the most common expense fraud types were these-

1. Duplicate Bills
2. Incorrect amounts [not matching the bills]
3. Restricted Items [like alcohol]

All these combined accounted for 18% of the total expense reimbursements [INR 37.8Crores] and that summed up to INR 5.48 Crores

Recommended Read: Types of Expenses Categories

How do expense frauds affect the organization?

1. Heavy monetary losses

Expense frauds sometimes cost companies millions. While it is easier for big companies to recover from such loss, small and medium businesses may take a terrible hit because they are more likely to function on small profit margins. 

2. It hurts the company’s image

For big businesses, employee scams can catch public attention. When employee frauds come to the public’s attention, they give the impression that the organization does not have the relevant structures in place.

This reflects poorly on the company’s expense policies and overall performance. The hit to the brand image may then cause a ripple effect and, in the worst cases, affect the value of company stocks. 

3. Encourages more malfeasance 

If an employee gets away with minor fraud the first few times, they get the encouragement to try worse schemes in the future. If you do not take punitive or disciplinary measures upon fraud detection, some employees may think you can get away with fraud. 

Also, Read: What is Spend Management?

Why do employees commit expense fraud? 

Knowing the exact reason why an employee decides to commit expense fraud is tricky. If we could pinpoint that pain area, detecting and preventing expense fraud would have been easier. However, even if we cannot know the exact motivations behind the fraud, here are a few likely reasons that might influence individuals to take the wrong step.

1. They think they deserve it – They feel like they deserve the extra money. Some employees believe that since they have put in overtime and sacrificed personal time for the organization, the business owes them the treat.

2. They think wanting interest is fair – Some employees may feel that since reimbursements are slower, they are entitled to some surcharge interest on their payments and that is why they overcharge the business during expense filing.

3. It’s easy – When employees realize that the company does not have an expense management infrastructure that can successfully challenge faulty claims, they feel inclined to exploit it. The more often they get away with it, the bolder they get.

4. They are not happy – When employees are not content with their salaries and compensation, they might feel inclined to indulge in practices that could hurt the organization and give them some extra earnings. 

Quick Read: What are Operating Expenses?

Image Credit: scaledon.com

5 signs that your employees are committing expense fraud

1. Some employees are spending more than others

Generally speaking, employees with identical job descriptions or in comparable positions should have similar expenses. If their expenses vary significantly, you may want to take a closer look at the expense reports of the employee spending more.

Organizations need to look at the spending trends over time and correlate them with their ROIs. Ideally, higher spending should come from top performers who can make your money count.

Companies also need to set a clear and fair expense policy and train their employees on the types of places they should stay while traveling or going for business dinners.

2. Claiming non-business items

A very common type of claim is to submit personal expenses under the category of a business expense. Usually, there is no way of categorizing such a claim by only looking at the submitted receipt. 86% of global office workers said that they have never had any of their expense claims challenged or declined!

Companies need to solidify what types of expenses are to be charged to the business. One way to do so is to educate the employees and train the managers to approve the reports.

Many companies also use Travel and Expense (T&E) platforms that restrict usage of the company card to certain merchant codes, POS machines, specific cities, etc. to avoid any misuse. It also allows the finance team to load/withdraw money in a matter of minutes.

All transactions done on company cards are automatically captured in their expense account. Also, the system automatically rules out any prohibited items (like alcohol, non-vegetarian items, etc.) that are not allowed to be claimed based on your company’s policies.

3. The trend of duplicate bills

Duplicate billing happens in two ways –

• The same bill was expensed by an employee multiple times – Employees charging expenses twice for different trips or days. Additionally, some employees may charge on their company credit cards and later submit a receipt for the same purchase as a cash claim.

• The same bill is expensed by 2 different employees – Sometimes a legitimate bill is expensed twice by different employees. The finance team then ends up approving duplicate payments, if they’re not careful about accepting expense claims.

A few T&E platforms provide automated audits for each line item in your expense reports to auto-flag any invoice submitted in the system twice, be it from the same employee or a different employee. This way your finance department doesn’t have to sift through paper statements or old spreadsheets.

4. Overstating expense

Often, employees inflate the cost of a legitimate expense. Some of the common examples of this are adding a zero to the amount by mistake or a misplaced decimal point.

Whenever possible, a receipt should accompany every claim on an expense report. However, since collecting and keeping physical receipts is an enormous hassle, T&E platforms provide on-the-go capture of receipts.

With Optical Character Recognition (OCR) technology, T&E apps can recognize text within a digital image. This enables the application to capture expenses at the source, ensuring accurate data is captured in the system.

5. Unexplained vehicle mileage

If your company offers expenses as mileage reports, then you should be careful with auditing them because mileage reports can be tricky to verify. In organizations with a huge field force, validating or checking the accuracy of mileage logs is just not possible as long as you stick to manual expense claims.

Additionally, calculating mileage through a traditional setup becomes quite challenging for the finance team when the employee has made multiple stops on the trip.

A GPS-powered mileage tracker only requires your employees to add their start and end destination. The mileage rate and calculations are all taken care of by the system and added as an expense in the employees’ expense app. Employees can add if their vehicle is a two-wheeler or a four-wheeler. They can also add the number of stops in their mileage logs and the system adjusts for these in mileage calculations accordingly.

Also, Read: 9 Expense Management Best Practices

How to identify expense fraud?

Identifying expense fraud might seem like a mammoth task, and bear no doubt that it absolutely is! No one can quantify or optimize human ethics. However, there are a few tell-tale signs the finance team can watch out for to catch threats early on. 

1. Flag unusual expense claims

While reviewing and approving reimbursements, look out for the employees claiming higher amounts than their colleagues for the same activities. While they may just be choosing more expensive alternatives within the amount specified by the policy, it may also indicate that an inflated expense fraud is underway.

2. Keep a tab on client gift and meal claims

Treating important clients with lavish meals and gifts is an acceptable practice for businesses. However, when they start occurring too frequently, it can either mean that your employees are working extra hard to acquire new business or pocketing some of the luxuries that belong to the customers. Either way, it is wise to closely observe client-related reimbursement practices. 

3. Check for date and time anomalies in claims

Sometimes employees may submit older expense reports to claim reimbursement for an expense that was never made on the company’s behalf or has already been reimbursed. 

It is difficult to check receipts for date and time anomalies manually. However, adopting an expense management system that automatically flags inconsistencies can help you identify this type of fraud early on. 

4. Regularly question employees about expenditures

Have an honest discussion with your employees whenever minor inconsistencies are caught. This can help you understand if the misreporting was malicious or innocent human error.

5. Compare spending patterns across teams and individuals

An analysis of your company’s past and current spending patterns can tell you how your expenses generally function. This can help you identify irregularities more easily. 

However, doing this is difficult with manual expense management processes as well. It is best to use software that centralizes your spending data, puts them into categories and then produces comprehensive reports that you can study. 

6. Use automation

You can program your automation-enabled expense management software to detect any inconsistent, duplicate, or irregular expense reports. The software will flag potential problems that can be reviewed by your team. This simplifies the expense fraud detection process. 

Mr. Khabra recalled-

“Our finance team receives 4.5k-5k expense reports with 30k-35k bills every month. It’s not even humanly possible to check and match so many bills manually without errors. We definitely need some digital AI-enabled solution which automatically or should I say magically weed out these DUPLICATE expense bills.”

Suggested Read: Expense Management Automation Process

9 ways to prevent expense fraud 

Precaution is always better than the cure. Here is how you can build an infrastructure that cripples all fraud schemes even before conception. 

1. Create and communicate a robust expense policy

There is no such thing as too much specificity. Your expense policy must mention everything in the most minute detail. Everything from valid expenses, acceptable categories, amounts, reimbursement processes, approval hierarchies, conflict resolution methods, punitive actions, etc., should be mentioned in the policy. 

It is crucial to ensure that all your employees understand the expense policy well. Take time out to educate the entire team about what is acceptable and what isn’t. 

2. Build a strong approval process

Numerous reimbursement requests can often overwhelm finance officers or managers, causing them to not verify expenses before approving them. Many expense frauds become possible because of inefficient approval processes. 

Optimizing the reimbursement approval process can save the company a lot of money. Make sure that the approvals follow a clear hierarchical structure. Assign a separate team dedicated to the verification of receipts and supporting documentation to avoid duplication and fictitious spend fraud. 

3. Conduct internal audits

Internal audits let you understand the main bottlenecks and issues of the expense management process. They also enable the early identification of frauds that have already occurred. Internal audits are vital if your organization depends on manual reimbursement processes. 

4. Use expense management software

Expense management software seamlessly integrates expense policies with a digital system that is almost impossible to defraud. Setting up a strong technological infrastructure safeguards you against errors committed because of manual processes. 

Expense management software lets you automate most key, repetitive tasks in the reimbursement process. It also allows you to pre-set expense limits for various levels of employees and keeps track of all the cancelled expenses. 

5. Real-time expense tracking enabled cards

Pre-paid cards simplify the expense filing process as employees do not have to track receipts. Every time the employee makes a purchase, the finance team or manager can review and see it in real time. It increases transparency and accountability to the extent that expense frauds become nearly impossible to commit. 

6. Review credit activity on a regular basis

If your organization uses corporate credit cards, ensure that the credit activity is reviewed and analyzed every month or every quarter. Credit reports give you an insight into monthly cancellations and refunds. Comparing the credit activity reports with actual company expense reports can show you if expenses were accurately reported.  

7. Instate dual approvals

The expense report should pass through multiple stages to get approval. First, the manager or equivalent supervisor should review and approve an expense report. Then, someone from the HR department or payroll team should also ensure its validity. 

8. No cash disbursements

Tracking cash payments is very difficult. Hence, the best way to make monetary disbursements to employees is through electronic transfers. Giving employees per diem amounts as cash can give them the scope to spend on personal expenses without having to account for them. 

9. Take punitive action

If you are able to catch an employee indulging in fraudulent activities and misreporting expenses, ensure that they are punished lawfully. If you allow them to leave without repercussions, it could encourage others to follow suit. 

Donning a sarcastic hat, Mr. Kabra quotes some of the “honest mistakes” that his employees had claimed:

‘I have added a zero to the amount by mistake – 345 became 3450’

‘The decimal point got misplaced – 1999.50 converted to 19995.0’

Also, Read: 7 Top Expense Management Challenges

Happay solves all expense management issues with efficient technology

The Happay team worked with Mr. Kabra in 2020 to see if we can find a solution to their problems. We showcased our AI-powered end-to-end expense management solution to them and introduced our Duplicate Checker feature. Our teams worked together and implemented Happay’s expense management solution for all 5000 employees across 12 locations. 

Happay’s Duplicate Checker feature along with Smart Audit helped Mr. Kabra’s team optimize their expense management processes and avoid expense fraud. Smart Audit immediately flags any duplicate receipts and non-compliant and unauthorized transactions. It gives you 100% visibility into employee spending. 

Schedule a demo with the Happay team if you want to safeguard yourself against employee expense fraud.

Expense fraud – FAQs