Skimming and scamming: Detecting and preventing expense reimbursement fraud

It can be stated that fraud is the second oldest profession – I’m fond of saying “where there’s money, there’s money to steal.” Even after 15 years as a forensic accountant, it never ceases to amaze me that fraudsters think they can get away with their crimes. All in the name of securing additional cash.

According to the Association of Certified Fraud Examiners’ 2018 Report to the Nations, expense reimbursement fraud accounts for 21 percent of fraud in small businesses (those with less than 100 employees), and 11 percent in large businesses (those with 100 or more employees). In fraud investigations, this type of scheme is often considered the “low-hanging fruit,” because it is easy to detect. If you come across an expense reimbursement fraud, understand that it can also indicate a much larger problem. If someone is willing to perpetrate one scheme, they are often willing to perpetrate others. Cases can range from a few hundred dollars of padded receipts to millions in a systemic scheme that spans several years.

A client of mine recently discovered that their second-in-command and heir-apparent CEO had forged the company CEO’s signature on her expense reimbursements. The company initially wrote it off as poor judgment and an effort to be reimbursed more quickly. Unfortunately, it didn’t take more than a few hours of forensic investigation to discover an unbridled expense reimbursement fraud scheme that spanned nearly 10 years and totaled more than $1.4 million before it was detected. The promising young executive – a woman who had the world by the tail – traded it all for an orange jumpsuit and prison time in a federal penitentiary.

How does expense reimbursement fraud happen?

Expense reimbursement fraud can occur through various schemes. The most common are:

• Fictitious reimbursements. An employee submits a report for expenses that never happened by crafting fake receipts. Personal computers, design programs and software make creating counterfeit receipts easy. There are even legitimate companies that will create counterfeit receipts for any store, date, or amount.
• Mischaracterized reimbursements. Expense reimbursements are for business-related purchases only. This fraud is as simple as an employee who remits receipts for personal expenses as if they were business expenses. Case in point: The heir apparent remitted a receipt for a “pink toy” but categorized the expense as “meals while out of town.”
• Altered reimbursements. The employee alters a receipt for a legitimate business expense (i.e., writing in a larger tip amount on a meal expense or inflating mileage.)
• Duplicate reimbursements. The employee remits the same receipt more than once. For example, they submit a receipt for reimbursement and then present the credit card bill for the same item for payment.

How can expense reimbursement fraud be prevented?

1. Set the tone at the top. No amount of internal control will deter fraud if management does not establish a culture of honesty. This means enforcing anti-fraud policies, ethically conducting the business, providing a safe way for whistleblowers to report suspicion, and rewarding tipsters. Leadership must lead by example and model the expected behavior.

2. Require original receipts for all purchases. It can be easy to manipulate an original receipt before scanning it or copying it, such as changing number 6 to number 8. Requiring original receipts reduces this potential.

3. Require double-review. Even in small businesses, at least one additional review and approval should occur before the expenses are paid. In the case study, had another employee reviewed the reports before a check was cut, the theft might have been deterred immediately.

4. Establish a travel reimbursement policy. These guidelines should detail prohibited activity (such as purchasing alcohol) and per diem limits (such as meals, hotel rates and airfare).

5. Conduct spot audits. Periodic, unannounced reviews of employee expense reports can help uncover anomalies and ensure that proper documentation exists that correlates the expense to the disbursement.

6. Prosecute fraudsters. Employees who violate policies or falsify expense reports should be reprimanded according to the severity of the error, up to and including termination. If they remain unpunished, others will view their actions as acceptable.

Proper oversight of expense reimbursements is as critical as internal controls over incoming cash and outgoing payments. When employees know that significant scrutiny is applied to their reimbursements, they will be less likely to manipulate them. If you suspect fraudulent business expenses in your company, or as a CPA, in your client’s company, a forensic accountant can help detect, quantify and potentially recover lost funds. In addition, he or she can help implement internal controls to reduce the likelihood of fraud occurring in the future.