What is Expense Fraud? How Can You Prevent Employee Expense Fraud?

Expense fraud is a serious issue for businesses, with surveys reporting numerous employees admitting to submitting false expense claims. With this in mind, tackling the problem of employee expense fraud should be on the agenda of every business looking to reduce its expenditures.

What is Expense Fraud?

Expense fraud, also called expense fiddling or expense reimbursement scheme, refers to the falsification or manipulation of expenses to receive reimbursement or to avoid paying out of pocket. It is considered unethical and illegal in many businesses as it is a form of financial fraud.

Examples of employee expense fraud include but are not limited to:

Expenses claims that are unused. For instance, submitting fake receipts or invoices for reimbursement.
Expense inflation, such as increasing the cost of a hotel room in an expense report.
Misclassification of an expense as being for business purposes when it was actually for personal use. For example, claiming a vacation as a business trip.
Duplicate submission of expenses. Using the same receipt multiple times for reimbursement is one example.
Using company funds for personal expenses, such as a company credit card for personal purchases.
Mileage falsification of travel expenses. Claiming a higher mileage rate or a more expensive mode of transportation than what was used.

It's worth noting that these examples of grave misconduct are considered illegal. Employees should always follow the company's expense policy and guidelines to avoid repercussions. Accounting processes should also ensure that these misconducts will be prevented during expense claims. Automated accounting tools like Xero or Quickbooks can provide an easy way to tackle these problems.

Why do Employees Commit Expense Fraud?

Employees may commit expense fraud for many reasons, including financial gain, personal gain, or a lack of understanding of company policies and procedures.

Financial gain: Some employees may commit expense fraud to pocket extra money for their use.
Personal gain: Some employees may commit expense fraud as a personal choice.
Lack of understanding: Some employees may not fully understand company policies and procedures for expense claims. They may make mistakes or submit inaccurate expenses without realizing it.
Pressure and Stress: Some employees may feel pressure to meet targets or quotas and may falsify expenses to make it appear that they have met them.
Apathy: Some employees may feel apathetic towards the company and engage in expense fraud as a form of passive rebellion or disregard for the rules.

Always remember that these reasons are not excuses for committing employee expense fraud; it is not justifiable at all.

What Methods can Effectively Prevent Expense Fraud?

As a business, you can prevent expense fraud in your organization by practicing the following:

Revisit/Enhance Company Expense Policy

Revisiting a company's expense policy can help prevent expense fraud by ensuring that the policy is clear, concise, and easy to understand for all employees. It can also help ensure that the policy is up-to-date and relevant to the company's current business needs.

Additionally, a clear and concise expense policy that defines what types of expenses are eligible for reimbursement and what documentation is required can help prevent employees from submitting false or inaccurate expense reports. Aside from that, regular training and educating employees on the company's expense policy can ensure that all employees understand the policies and are aware of what expenses are eligible for reimbursement. Lastly, detailed and specific documentation requirements, such as an original descriptive receipt, can help prevent employees from submitting false or duplicate expenses.

It's important to note that revisiting the company's expense policy should also be done in a way that aligns with your company's culture and values. It should not create an unnecessary burden or paperwork for employees.

Conduct Expense Audit Regularly

Regular expense audits can be effective in preventing employee expense fraud by identifying any discrepancies or patterns of misconduct. Here are some steps for conducting a regular expense audit:

Develop an audit plan: Create a plan that outlines the scope of the audit, the specific areas of focus, and the schedule for conducting the audit.
Gather and review expense reports: Collect all expense reports for a specific period and review them for compliance with the company's expense policy. Look for any red flags: missing or incomplete documentation, duplicate expenses, or excessive or unreasonable expenses.
Verify expense documentation: Verify that all expenses have proper documentation, such as original receipts, invoices, and detailed descriptions. Check that the documentation complies with the company's policy.
Perform data analysis: Use data analysis techniques, such as trend analysis and statistical sampling, to identify any patterns or irregularities that may indicate expense fraud.
Communicate findings and recommendations: Prepare a report of the audit findings and recommendations for improvement, and communicate it to the appropriate parties, such as management and/or the board of directors.
Follow-up: Follow up on any recommendations made during the audit and ensure that any issues identified are resolved.
Schedule and plan for future audits: schedule the next audit based on the findings of the current audit, and plan for it accordingly.

As with the company policy, the expense audits process should align with the company's culture and values. In addition, the audit process must be confidential and impartial to ensure the integrity of the findings.

Establish Guidelines for Processing Erring Employees

Establishing guidelines for processing employees who commit expense fraud is vital in preventing and addressing misconduct. Below are some steps for establishing the guidelines to prevent employee expense fraud:

Clearly define expense fraud: Clearly define employee expense fraud in the company's expense policy, including examples of misconduct such as falsifying expenses, inflating expenses, or misclassifying expenses.
Establish disciplinary action: Establish clear and consistent disciplinary action for employees who commit expense fraud. This should include a range of penalties based on the severity of the misconduct, such as verbal or written warnings, suspension, demotion, or termination. Having clear and well-communicated disciplinary action for violators of the expense policy can help deter employees from committing expense fraud and create a culture of compliance.
Communicate the guidelines: Communicate the guidelines to all employees through regular training and education and by making the expense policy readily available to all employees.
Have a reporting mechanism: Establish a mechanism for employees to report any suspected expense fraud, such as a hotline or an email address, and ensure it's easily accessible and well-communicated.
Conduct investigations: Have a process in place for conducting investigations into any reports of employee expense fraud, and ensure that investigations are conducted confidentially and impartially.
Have a post-investigation process: Establish a process for handling the outcome of investigations, including disciplinary action and measures to prevent a recurrence.
Review and update: Regularly review and update the guidelines to ensure they remain relevant and effective.

Always remember that these guidelines should be consistent with any legal and regulatory requirements. The main goal is to create a culture of compliance and integrity within the organization.

Leverage Technology

Technology can be a powerful tool for preventing expense fraud by automating the expense reporting and reimbursement process and by making it difficult to falsify or manipulate expenses. There are various expense management software you can utilize for this. Here are seven ways by which technology prevents employee expense fraud:

Automated expense reporting: Implement an automated expense reporting system that allows employees to submit their expenses electronically and automatically checks for compliance with the company's expense policy.
Electronic receipt capture: Use technology that allows employees to capture and submit receipts electronically, making it more difficult to falsify or manipulate expenses.
Data analysis: Use data analysis tools to identify patterns or anomalies in expense data that may indicate expense fraud.
Real-time monitoring: Use real-time monitoring and alerting tools to notify management of any potential fraud or policy violations as they occur.
Approval workflows: Implement approval workflows in the expense reporting process, where expenses are reviewed and approved by a manager or supervisor with the appropriate level of authority.
Integrate with other systems: Integrate the expense reporting system with other systems such as accounting, ERP, or scheduling apps to ensure data consistency and accuracy across the organization.
Implement advanced security: Implement advanced security features such as encryption, multi-factor authentication, and access controls to protect sensitive expense data from unauthorized access.

Technology alone may not be sufficient to prevent employee expense fraud. It should be used in combination with other measures such as a clear expense policy, regular training and education, and strong internal controls. Additionally, the technology should also be chosen based on the company's specific needs and should be easy to use and understand for employees.

You Can Prevent Expense Fraud with the Right Guidelines and Technology

For businesses, it is highly suggested to implement the measures above in order to avoid expense fraud by employees. It is relatively easy once the right process guides you. Finance teams should implement a clear and concise policy, regular audits, proper sanctions for erring employees, and an automated expense reimbursement workflow within your organization.

Schedule a demo today and see how Fyle automates this entire process in seconds!