Different Types of Expense Fraud and How to Control Them

Finance controllers know that travel and expense is one of the major expense categories in their organization. Businesses with frequent travelers should be aware that T&E is often a target for fraud. Modern T&E systems provide tools that evaluate spending trends and can find payment fraud.

An online spend management solution, and the use of a corporate credit card can identify possible fraud before the damage is done. Moreover, a well-established expense management policy helps prevent fraud in expense reimbursement.

A few types of T&E fraud are listed below:

Falsifying Car Mileage – Since receipts are not needed for using an employee’s car for business purposes, the accuracy of these expense claims is hard to audit.

Submitting Out of Policy Expenses – Employees may submit their personal expense incurred during  business trips. If the list is complicated, the approver can easily overlook and reimburse an inappropriate expense. It is common in manual T&E expense management process.

Manipulating Currency Exchange Rates – Employees who fly to other countries may purposely use an inaccurate currency rate when calculating their expenses in dollars within a manual process.

Improper Anti-fraud Controls – Inappropriate classification of expense policies applying to process claims can enable approvers to falsify business expense submissions by changing amounts.

The best ways to control these frauds:

• Sometimes the best system of internal controls can’t completely protect your business against T&E cheaters; there are a few spend management measures that should be applied to at least minimize the risk.

• Establish and implement clear policies on travel spend and define the types and amounts of acceptable expenses. The T&E policy should comprise procedures to be followed for obtaining approval to exceed the limits allowed.

• Tighten the review process to ensure that all expense items and amounts are reasonable. To minimize this risk, it is recommended to have a second reviewer analyze expense report data through an automated delegation of the approval process.

• Verify all dates of expenses submitted with the dates of the employee’s business travel to make sure they match. If two or more employees are traveling together, examine their spend reports against each other to find if each employee is claiming reimbursements for a shared taxi or mileage.

• Set up a pre-approval policy. It is used to find the proper approval level for certain types of spends. Expenses such as overseas business trips should require approval by higher authorities than those for regular client lunches or local trips.

• Ensure that your spend policy clearly defines the role of each employee within the T&E processing cycle. The policy should recognize the system access rights of each reviewer/approver and are significant for both automated services and manual processes.

The audit teams should be responsible for creating and conducting independent tests of all expense approval procedures. These testing procedures not only expose possible drawbacks in your approval processes but also to inform your employees that the audits act as a prevention to cheating by sending the message that the organization is serious about keeping its T&E expenses legitimate. Finally, integrating these policies with proper training will help keep fraud under control.