by Jim Marasco, The Daily Record, May 2016 As organizations expand their reach, business travel is becoming more common for employees and contractors of smaller companies. For some of these organizations, expense reimbursement fraud and abuse is something they never contemplated. Don’t let your company be caught blindsided. In the 2015 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners estimates that 14% of all asset misappropriations investigated involve expense reimbursement schemes.

Identifying the various types of fraud

Individuals committing expense report fraud can perpetrate a variety of schemes. The most popular involve:

• Inflating actual expenses.
• Claiming reimbursement for fictitious or non-business related expenditures.
• Placing greater emphasis on loyalty and award programs for personal gain.
• Violating an organization’s expense reimbursement policy.

Examples of inflating business expenses can include:

• Claiming reimbursement in excess of the allowed per diems.
• Adding tips to reimbursement when they were already included.
• Adding higher tip amounts to the reimbursement copy than what was actually left to the merchant/server.
• Staying at five star accommodations, flying first class or using luxury transportation when more modest options are available and practical.
• Inflating mileage totals on reimbursement for auto travel.

Examples of fictitious or non-business related expenses could involve:

• Claiming reimbursement for items that were never purchased (office supplies, education materials, etc.).
• Including expenses that were subsequently cancelled (airline tickets, seminar registration fees, tuition reimbursement, dues, etc.).
• Charging the organization for items that were used personally or for an unauthorized business purpose (alcohol, gas, groceries, leisure activities, sporting events, etc.).
• Collusion between employees who both seek reimbursement for the same expenses when traveling together.
• Seeking both per diem amounts and actual expenses.
• Deliberate falsification or manipulation of receipts.

Companies create loyalty and award programs to entice consumers for their repeat business. Unfortunately with business travelers, this also leads to the possibility of having individuals place a greater emphasis on these programs over the well-being of their employer or client. As a result, the organization can be financially harmed. Examples of this include:

• Selecting an airline, car rental or hotel based solely on the loyalty program versus the cost to the organization.
• Paying higher rates or bypassing discounts for services in exchange for extra “points”.

When traveling on behalf of an organization, individuals and contractors should adhere to the applicable travel reimbursement policy. While most of the examples described above involve fraud, abuse of these polices can occur and be just as financially devastating. Examples include fueling rental vehicles with premium gas, accepting auto rental insurance when none is needed, not taking advantage of applicable discounts when available, etc.

Safeguard your organization

To protect your company from expense report fraud and abuse, you should consider:

• Establishing and communicating a detailed travel reimbursement policy to all employees and contractors.
• Requiring original documentation to either be submitted with reimbursement requests or maintained for a specified period of time.
• Establishing a formal review process in which someone independent reviews the reports.
• Routinely inquiring about expenditures that look extraordinary or abnormal.
• Reimbursing in a formal manner through payroll or accounts payable – discourage cash advances.
• Using corporate charge cards for greater control and visibility. Periodically review this activity.
• Periodically auditing a sample of expense reports to ensure compliance.
• Requesting full documentation from contractors seeking reimbursement.
• Maintaining a consistent reimbursement process by either reimbursing the employee after the fact, or have the company pay directly. Vacillating between the two could allow for duplicate reimbursements to occur.
• Punishing offenders accordingly.

Set an example

Maintaining strong internal controls and consistently reviewing expense reports will certainly help safeguard an organization. However, setting a strong tone at the top is paramount. If top management is allowed to violate the policies or has a “separate set of standards”, be prepared for the rank and file to follow their example. Rules must apply to everyone and be followed to be effective in protecting an organization from fraud and abuse.

James I. Marasco, CPA, CIA, CFE, is a partner at Stonebridge Business Partners.