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The Hidden Costs of Expense Report Fraud

If there is one thing that tax preparers and accountants present to clients, it is their integrity. They are the professionals who can be consigned a client’s personal financial information or an entire firm’s financial well-being. They are the trusted business advisors and the ones most often tasked with rooting out fraud and theft.

There is an exception, of course: when they are cheating on their expense reports.

For many professionals, “padding” the expense account is a natural and acceptable way of balancing the high cost and inconvenience of travel, believing that the company can well afford a little bit of loss. The sad fact, however, is that cheating on expense reports is a major problem for tax and accounting firms – one that ultimately hurts profitability, client relations, and the industry.

The Scope of the Problem

While expense report fraud is not the only form of employee theft to impact an organization, it is the most prevalent.

The 2014 Global Fraud Study by the Association of Certified Fraud Examiners finds that companies lose about 5 percent of their revenues to such employee fraud each year – an aggregate potential loss of some $3.7 trillion dollars.

Yet many companies fail to take action on the issue of expense report fraud, or implement even the most basic controls, according to ACFE. This is dangerous in that it may create an environment in which small theft is condoned, creating the impression that unethical behavior is tolerated or even encouraged. This inevitably leads to other forms of fraud, such as:

  • Padding time sheets and billing statements, particularly by “rounding up” the hours billed, or adding other staff members to the bill.
  • Asset misappropriation, such as personal use of a company car, computer or credit card.
  • Asset theft, such as stealing office supplies to take home.
  • Financial fraud, including deliberate misstatement of tax returns and financial statements.

Why would more extreme forms of fraud be tolerated? Possibly because it starts at the top. ACFE notes that 27 percent of expense report fraud was committed not by staffers or middle managers, but by corporate executives.

Smaller firms feel a greater impact than larger organizations. Smaller firms suffer from different forms of fraud – more simple theft and inappropriate use of petty cash funds, for example – than their larger counterparts, but they also lack the kinds of anti-fraud policies and procedures that could help protect them from losses.

The Business Travel News, reporting on the ACFE survey, notes that roughly 17 percent of businesses with fewer than 100 employees were victims of expense reimbursement fraud, compared to 13 percent of larger organizations. However, the authors of the study noted that even when the dollar loss was lower, the impact of the loss was far greater on companies with lesser revenues.

The How and Why of Expense Report Fraud

There are any number of ways to cheat on the ordinary expense report:

  • Inflation of an expense. This includes putting an extra digit on a receipt, turning a three-dollar cab ride into a $13 expense, or changing a number on the receipt, like changing a zero into an eight or a one into a nine.
  • Failing to provide receipts. The IRS generally does not require a receipt for expenses under $25, so neither do many companies. This can lead to carte blanch fraud, as every expense suddenly becomes an amount just below that level. A $5 breakfast at a fast food counter becomes $12 plus tip.
  • Simple inflation of the bottom line. In some companies, adding up the individual expenses to make sure they match the final reimbursement figure is cursory to non-existent. Simply by adding an extra “1” to the hundreds column can yield more than a thousand dollars a month in “found income.”
  • Hiding alcohol. On the road, with nothing to do, it’s easy to find oneself in the hotel bar or a local watering hole. Companies, however, are loathe to pay for drinks unless there is a business reason for them. And even then, the IRS rules are pretty strict. All it takes is for the server to list three rounds or so as a pricey appetizer in return for a generous tip, and the employee drinks for free.

As to why people choose to do this, “Employee X” has published a book entitled How to Pad Your Expense Report...And Get Away With It! that outlines four major justifications:

  • The company can afford it. A company that makes thousands, millions, or even billions of dollars can afford to lose a little money. And since the theft is before taxes, a business paying 50 percent or more in taxes will lose only 2.5 percent on the fraud.
  • Senior executives give themselves huge salaries and bonuses. Meanwhile, employees are laid off without a second thought, families destroyed by plant closings, and wages are cut to boost the wealth of the shareholders. Expense report theft is just a way of evening the score.
  • Executives grant themselves massive perks. From company cars and country club memberships to season tickets for sports teams, executives from the VP level up are given these free perks. The middle manager gets nothing.
  • Salaried workers get no overtime. Unlike wage employees, salaried employees are expected to work long hours – including weekends – at the whim of management. But since there are salaried, they will receive no pay for these extra hours, no matter how much stress this may put on employees and their families. Expense report fraud is simply pay for those extra hours.

Another excuse given by some fraudsters is that they are only breaking even on the high cost and inconvenience of travel. Their rule is no one should make money on an expense report, but neither should money be lost. Padding here and there takes the edge off of all the little things (like coffee in the mid-afternoon) that are not strictly reimbursable.

How to Prevent Expense Report Fraud

Sophisticated software and report scanning software can be expensive, but most fraud can be prevented easily and inexpensively.

It begins with an ethics policy that is clear on the issue and is enforced for everyone in the firm. New employees should be placed under the tutorship of a more experienced staff member who can educate new hires – who may have never filled out an expense report – on the basic rules. The policy can have room for innocent errors, but should make it clear that deliberate fraud is grounds for termination. It should make it equally clear that knowing about fraud committed by someone else and not reporting it is also grounds for termination.

Require original receipts for every expense, no matter how small. On the back of each receipt, have each employee note the reason for the expense. Yes, it is painful to take the time to collect and remit each receipt, but the reward might be a five percent or better increase in revenue.

Insist that expense reports be filed on a timely basis – monthly or even weekly – at the minimum. It becomes more difficult to remember expenses months after the fact, so this helps keep reports accurate.

Keep a watchful eye on the company. If profits are declining for no apparent reason, look for fraud. Consider how a staff member might steal from the company if they wanted to, and close any loopholes that are found. Watch for fraud patterns – for example, two employees on the same business trip who file very different expense reports.

Review every expense report to ensure that the math is correct and that the numbers match traditional or previous year expenses for similar trips or jobs. Look for subtle alterations in receipts, or unusual expenses (sports tickets, expensive wines, etc.). If fraud is found, investigate not only the employee involved, but others in the department, including that employee’s manager. Fraud is a cancer, and can spread quickly through a department.

Keep a watchful eye on employees as well. When hiring, use interviews and background checks to look for people who have a past history. That’s not easy to do, as most people who get caught are protected from disclosing reasons they were fired. But at least make the effort. Also, watch for unusual patterns. The employee who arrives early and leaves late may be a dedicated person trying to impress – or may be someone who is rooting through the trash from accounting to find receipts they can use.

Finally, make use of technology tools that enable expense report tracking. There are smartphone applications that allow expenses to be entered as they occur, and will even take a snapshot of an original receipt for conversion to PDF format and attachment to the expense report.

Expense report fraud is pervasive, costly, and detrimental to the reputation of the firm. It is, however, a preventable loss that does not require a great amount of expense or effort. It requires only an executive team committed to ethical standards and keeping a close eye on the company and clients that we’re hired to safeguard.

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The Taxing Subjects staff is proud to cover the latest in tax-industry-related news, from tax law and IRS updates to technology and business strategies. If you have questions about an article or just want to reach out to the Taxing Subjects staff, email comments@taxingsubjects.com.

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