Companies must contend with a variety of sophisticated fraud schemes on an ongoing basis, and few forms of fraud are more common—and cause more headaches for compliance teams—than expense reimbursement fraud schemes.
Expense reimbursement frauds are common, financially damaging, and one of the most challenging forms of fraud for companies to detect. The Association of Certified Fraud Examiners’ 2022 Report to the Nations, which analyzed over 2,000 cases worldwide, noted that expense reimbursement frauds lasted for an average of 18 months before detection, making it one of the longest-lasting forms of fraud. The report indicated that expense reimbursement fraud, which accounted for 11 percent of all cases, is the third most common form of fraud that companies face, only outnumbered by cases of non-cash misappropriations and billing schemes.
Expense reimbursement fraud doesn’t account for as high a median loss as other forms of fraud. Still, the high number of fraudulent expense reimbursement cases that companies have to contend with and their tendency to remain undetected for extended periods makes it one of the highest-risk forms of fraud for companies and their compliance teams. Therefore, compliance professionals must understand how expense reimbursement fraud occurs and how to detect, prevent, and resolve cases of expense fraud within their organizations.
What Exactly Is an Expense Reimbursement Fraud Scheme?
First, it’s essential to have a clear understanding of what expense reimbursement fraud is. The Association of Certified Fraud Examiners defines an expense reimbursement scheme as a form of fraud where an employee makes a claim for reimbursement of fictitious or inflated business expenses, such as an employee filing fraudulent expense reports or claiming personal travel or nonexistent meals.
Expense reimbursement fraud can take various forms, and compliance teams must have the necessary policies, procedures, and software to detect each of them proactively. They must also be able to quickly resolve cases of expense reimbursement fraud that manage to slip past the company’s preventative measures.
Expense reimbursement fraud schemes can be broken down into four categories: mischaracterized expenses, overstated expenses, fictitious expenses, and multiple reimbursements.
Mischaracterized Expenses
Employees can mischaracterize expenses by submitting an expense report for personal goods or services unrelated to the business. Some mischaracterized expenses are easily detected, such as an employee who files an expense report for electronic goods, furniture, or an entertainment event that is unrelated to their work responsibilities. Other forms can be subtler. An employee might have to expense an airline ticket or a hotel booking for business travel, but it’s possible that they could file additional expenses for multiple airline tickets and hotel rooms to bring family or friends with them who are not involved in the business.
Overstated Expenses
An overstated expense is an expense that exceeds the actual cost of a good or service. An obvious example would be an employee who files a $5,000 expense report for an ordinary meal. Yet, it’s more common for fraudsters to repeatedly overstate more minor expenses, such as a $15 meal filed as a $25 or $40 expense. These small overstated expenses can quickly add up, and it can be difficult for compliance processes that rely on manual reviews to detect all of them. Overstated expenses can sometimes result from human error, making it more difficult for a company’s compliance teams to determine if wrongdoing is intentional.
Fictitious Expenses
One of the most blatant forms of expense reimbursement fraud is fictitious expenses. These occur when an employee files an expense report for a purchase that was never actually made. Fictitious expenses can take several forms, ranging from an employee completely fabricating the purchase of a good to an employee obtaining a complimentary meal or gift and subsequently filing an expense report for it. Requiring employees to submit receipts for their expenses can prevent some fictitious expenses. Still, it is also possible for employees to fabricate receipts, modify legitimate receipts, or collude with a vendor to obtain a receipt to game the system.
Multiple Reimbursements
A multiple reimbursement scheme is when an employee submits the same expense report multiple times or files an expense reimbursement claim for the same good or service on the same expense report multiple times. Fraudsters can take several steps to hide this type of scheme from their company. For example, an employee could wait weeks or months to submit a duplicate expense or could submit it to a different expense approver in the company. Duplicated reimbursements on an expense report can be caused by human error, especially on longer and more complicated reports, further complicating detection and investigation efforts.
Why Have Companies Traditionally Struggled to Manage Expense Reimbursement Fraud Schemes?
Some forms of expense reimbursement fraud can be misconstrued as unintended errors by well-intentioned employees, but that doesn’t tell the whole story of why expense reimbursement fraud is such a common issue for companies and takes so long to detect.
Several factors have caused companies using traditional compliance tools and processes to struggle with detecting and quickly resolving cases of expense reimbursement fraud.
First, expense reports are a necessary part of every company, and the larger the company, the higher the volume of expense reports filed. Most companies use manual manager reviews and sample audits of expense reports as the main tools to prevent and detect expense reimbursement fraud. The sheer volume of expense reports filed at many companies, however, can make it challenging for managers and compliance teams to approve each report on time, much less analyze each report for potentially fraudulent activity.
In addition, the fraudulent scheme may extend over multiple expense reimbursements, such as in the case of duplicates, further limiting the effectiveness of the human review of each expense report. When human error and a fraudsters’ efforts to mask their expense reimbursement fraud are added to the equation, it’s not particularly surprising that so many cases of expense reimbursement fraud fly under the radar for months or even years.
Second, some companies lack policies and procedures to inform employees about permitted expense reimbursements. Companies that do not require employees to submit receipts for expense reimbursement reports make themselves vulnerable to fraudsters. Though it’s common for companies to require receipts, many do not take additional steps to prevent expense reimbursement fraud. Since receipts can be forged or improperly modified, other measures are necessary for companies to adequately protect themselves from expense reimbursement fraud.
While fraudsters can always choose to disregard their company’s expense reimbursement policies, having transparent guidelines will cut down on accidental cases of improper expense reimbursements and give the compliance team a clearer idea of what kinds of warning signs to look out for in expense reports.
How Can Companies Detect and Prevent Expense Reimbursement Fraud Schemes?
While most companies have policies and procedures to detect and prevent expense reimbursement fraud schemes, the frequency of these schemes and the time it takes to uncover them make it clear that traditional methods of combating expense fraud are insufficient. There are three critical ways that compliance teams can better protect their companies from expense reimbursement fraud schemes:
- Companies should ensure that they are fostering a culture of corporate compliance.
- Companies should put in place straightforward training programs and formal policies related to expense reimbursement fraud schemes.
- Companies should use data analytics and automation to bolster their ability to detect and prevent expense reimbursement fraud schemes from happening.
The first two solutions might seem self-explanatory, but it’s not uncommon for companies to lack a strong culture of compliance or meaningfully robust expense policies. First, compliance is most effective when it’s practiced from the top-down. If a company’s executives and managers demonstrate ethical behavior, employees will be more willing to follow suit. Leadership should encourage employees to report unethical conduct and support rather than penalize whistleblowers. Second, companies must ensure that their policies are working in practice. For example, most companies require receipts for expense reimbursements, but requiring additional details about an expense, such as the number of people who participated in a meal and the cost of every item, can make it more difficult for fraudsters to cheat the expense approval process.
One of the most effective tools companies can utilize to protect themselves from expense reimbursement fraud is data-driven software and automation. Traditionally, compliance teams have to manually approve each expense reimbursement request and rarely have time to analyze each request for potential wrongdoing thoroughly or to compare reimbursement requests to one another to identify suspicious outliers. On the other hand, data-driven software can automatically analyze reports to determine if part of the request is abnormal, such as a suspiciously high reimbursement request for a company meal.
Data-driven software can detect other statistical outliers within, or across, reimbursement requests that manual and subjective reviews may overlook. Examples include an expense reimbursement request with an unusually high number of people involved and multiple expense reimbursement requests that feature identical expenses from the same vendor or supplier in a given period.
Compliance Data Analytics Solution for Preventing Expense Reimbursement Fraud
Historically, expense reimbursement fraud has been a significant pain point for companies and their compliance teams. Thanks to the advent of technology, it doesn’t have to be this way anymore. Lextegrity was founded by compliance experts who wanted to create solutions for expense reimbursement fraud and other compliance issues that they wished they had while they were in-house.
Effectively fight back against expense reimbursement fraudsters with an out-of-the-box compliance data analytics solution. To learn about Lextegrity and our many compliance solutions, reach out to us for a consultation today.
