Fraud Protection

Expense Fraud Prevention: How to Protect Your Business from the Inside Out 

Tips to Stop Expense fraud and reimbursement schemes in their tracks.

Some people will do anything for money including defraud their employer. Of course, the majority of any company’s employees are honest, ethical, and law-abiding but it’s still important for businesses to be on alert to prevent expense fraud.

According to the Association of Certified Fraud Examiners’ Occupational Fraud 2022: Report to the Nations®, expense reimbursement schemes account for 17% of occupational fraud cases in the U.S. and Canada. Additionally, the average loss from an expense report reimbursement scheme is $152,000 and typically occurs for up to 18 months before being uncovered.

To protect your organization from this costly threat, you need a robust fraud prevention strategy.

In this article, we’ll delve into the world of expense fraud, how and why it happens, and actionable tips on how to prevent it.

What Is Expense Fraud?

Expense fraud, also known as expense fiddling, expense reimbursement fraud, or expense reimbursement schemes, is a sub-category of asset misappropriation and occurs when employees intentionally manipulate an expense claim or falsify expense reports to receive undue money from their employers. This employee expense fraud It is illegal conduct that typically results in termination, and in extreme cases, involvement of law enforcement or legal action taken against the perpetrator.

The four most common types of expense reimbursement schemes involving expense report fraud are:

Mischaracterized Expenses:

Expense reimbursements are a way for businesses to pay their employees back for qualifying business expenses. Mischaracterized expenses are those that appear legitimate and compliant when submitted, but really are personal expenses incurred by the employee.
Examples include claiming personal vacation expenses as business travel expenses.

Overstated Expenses:

Overstated fraudulent expenses occur when an employee exaggerates the cost of a business expense, so they get reimbursed for more than they really paid. For example, an employee paid for economy airfare but submitted a reimbursement claim for a business class ticket, or a truck driver submitted an expense report with a higher gas price and mileage rate than what they really spent on the road.

Fictitious Expenses:

Just as they sound, fictitious expenses are completely made up. In many cases, fictitious expenses are bolstered by fake receipts created by an employee using design and photo editing tools. There are even templates and tools online that are designed specifically so people can customize a receipt.  

Multiple Reimbursements:

In this case an employee submits the same legitimate expenses more than once. If the team responsible for reviewing and approving reimbursements isn’t careful, this can easily go overlooked. This could also be an accident on the part of the employee, but regardless, businesses need to remain on the lookout.  

8 Tips for Fraud Detection and Protection 

Expense fraud is not a victimless crime; these fraudulent activities can add up to significant financial losses over time, directly undermining a company’s bottom line. But fear not! Preventing expense fraud is possible when you have the right expense policy policies, processes, and protections in place. 

1. Establish Clear Expense Policies

The first step in preventing expense fraud prevention is to establish clear and comprehensive expense policies. These policies should outline the acceptable expenses, documentation requirements, spending limits, and the process for submitting reimbursement claims. Ensure that all employees are aware of these expense reporting policies and understand the consequences of violating them.

2. Implement Robust Approval Processes

An essential part of fraud prevention is a stringent business expense approval process. All expense reports should be reviewed by multiple levels of management before reimbursement. Implementing a clear expense management hierarchy of approval ensures that no single individual can manipulate the system without detection.

3. Conduct Audits and Spot Checks

Periodic audits and spot checks of expense reports can deter fraudulent expense claims. activities. Randomly select reports for detailed scrutiny to keep employees on their toes. This proactive approach sends a strong message that expense fraud will not be tolerated. Bear in mind though that employees should always be given the opportunity to provide additional information and correct mistakes. Human error happens to the best of employees. 

4. Foster an Ethical Culture  

Creating a workplace culture that values integrity is fundamental. When employees feel that the company prioritizes ethical behavior, cares for its employees, and encourages honesty, they will be less likely to engage in employee expense fraud and report it when it happens.  
According to the ACFE, 42% of occupational fraud is initially detected by tips from employees, customers, and other informants. The same report found that more perpetrators are in roles with higher levels of authority, so make sure employees at all levels of the organization have a safe outlet for them to report on suspected fraud.

5. Create a fraud hotline or reporting mechanism

Hotlines are a safe and effective outlet for employees to report tips on occupational fraud—organizations with hotlines detect fraud up to 6 months faster than those without. In addition to a traditional phone hotline, having an email, anonymous tip form, or chat line are good backups, just make sure it’s accessible to everyone.
If a tip is reported by an employee directly to a manager, it’s important that that manager knows what the fraudulent expense claims procedure is to evaluate the tip, escalate the report, and protect their employee who reported it.

6. Educate and Train Employees

A well-informed workforce is your first line of defense against expense fraud. Trainings on the company’s expense policies, ethical behavior, and the consequences of business expense policy violations fraud should be mandatory for employees semi-annually, not just when an employee is getting onboarded.
Making sure your employees understand the expense reporting systems and all of the requirements to get reimbursements approved. Expense reports can be tricky so encourage open communication and for employees to ask questions when necessary.

7. Reevaluate Reimbursements as the Primary Way to Manage Employee Expenses

Expense reimbursement, where employees use their personal funds for a legitimate expense, submit an original receipt, and then get paid back by their employer later, is simple enough in theory, but using it as the primary method for managing business expenses leaves a lot to be desired.
If for instance an employee did not receive timely reimbursement, the amount expected, or reimbursement was denied unexpectedly, the employee’s personal funds take the hit. This could hurt the employee’s trust in the company and even give way to the “they owe me” mentality that inspires reimbursement schemes in the first place.
Corporate debit and credit cards take an employee’s personal finances out of the expense equation. They don’t eliminate the possibility of expense fraud altogether, but certainly improves a business’s oversight and controls on spending.

8. Embrace Expense Management Technology

Using a spend management platforms with expense reporting systems can significantly enhance your fraud prevention efforts. The expense management software technology does most of the heavy lifting. For example, with U.S. Bank Spend Management is a corporate credit card-based platform, so businesses get real-time expense reports and policy violations get flagged as transactions they happen. The spend management platform also offers robust spend controls so businesses can make sure employees are only spending when, where, and how much they’re authorized to.  

The Bottom Line

Expense fraud can be financially devastating for businesses, but with the right fraud prevention measures in place, you can protect your company’s finances and reputation against fraudulent expense claims. By establishing clear policies, embracing real-time reporting technology, educating employees, and fostering an ethical culture, you can significantly reduce the risk of expense fraud. Remember, prevention is always better than dealing with the aftermath of fraud. Start implementing these fraud protection strategies today to protect against fraud fraudulent activity and ensure that reimbursement schemes are never realized.