Expense reimbursement schemes are extremely common in companies. Employers may underestimate the costs of this type of fraud. Perpetrators of these schemes range from administrative employees buying company supplies to highly compensated executives with million dollar travel budgets. One of my first assignments in the beginning of my career was to audit the expense reports of the officers of a large company. I was amazed at the number of personal expenses improperly submitted on these reports.
In most companies, employees submit expense reports detailing all expenses incurred for business purposes, such as meals with clients, business travel expenses, etc. Usually, the employee is required to explain the business purpose of each expense and provide supporting documentation such as a receipt, cancelled check or personal credit card statement. Typically, the report must be approved by a supervisor in order for the expense to be reimbursed. It is not uncommon for the review of expense reports to be cursory at best, and for companies to allow a wide range of latitude in acceptable forms of documentation to support expenses.
The most common type of expense reimbursement schemes are as follows:
- Mischaracterized Expenses: The most basic type of scheme is to request reimbursement for a personal expense by claiming that the expense is business related. For example, claiming dinner with a friend as “business development.”
- Overstated Expenses: One way employees may overstate their expenses is by altering a receipt or other supporting documentation to reflect a higher cost than was actually paid. Another method is “over-purchasing” business expenses. This is commonly used by employees who travel. For example, an employee will purchase a second ticket to the same travel destination. The second ticket will be more expensive than the first one. Then the employee refunds the second ticket and flies on the first (less expensive) ticket. However, the employee attaches the receipt from the more expensive ticket to the submitted expense report.
- Fictitious Expenses: It is fairly simple for employees to create realistic counterfeit receipts to support fictitious expenses. In addition, some employees will request blank receipts from legitimate companies and fill them in later. In some cases, an employee will even steal blank receipts from a hotel or restaurant, and use them over time to submit fictitious expenses. Another method is to write checks, photocopy them as support and then destroy them. Therefore, the employee never actually incurs the expense. With credit card statements, once the expense report is filed, the employee can return the item and receive a credit to his/her account.
- Multiple Reimbursements: The most common example of this scheme is submitting several types of support for the same expense. For example, an employee might submit an airline ticket stub and a travel agency invoice on separate expense reports in order to get reimbursed for the cost of a single flight twice.
Overall, the best detection method is a detailed review of employee expense reports. Detailed reviews and periodic audits of travel and entertainment accounts will not only detect these schemes, but deter employees from submitting personal or fictitious expenses for reimbursement