Imagine a scenario where an employee submits an expense for a business lunch that significantly exceeds the approved spending limit. Or an employee claims travel expenses for a weekend trip, which was, in fact, a personal one, but the dates on the hotel receipt had been manipulated. These hypothetical situations represent real-world examples of what expense fraud looks like whilst highlighting its diverse forms and potential consequences.
Expense reporting is essential for most organisations. It’s a way to keep control of spending, understand where money is going and even develop strategies to make a company grow. But while the action has benefits, it also brings some hidden risks. Inaccurate or fraudulent expense claims can lead to significant financial losses and threaten an organisation’s well-being.
Avoiding expense fraud is a full-time job for most finance teams and entails keeping a close eye on all expense claims filled by employees. For that, Finance professionals need to be aware of the complexities of expense fraud and how it might look so they can apply effective strategies to mitigate the issue. And that’s where modern and advanced technology comes into play.
What is expense fraud?
Expense fraud is one of the most common types of fraud employees commit. The Association of Certified Fraud Examiners (ACFE) defines expense fraud as “a scheme in which an employee claims reimbursement of fictitious or inflated business expenses.” Also known as expense reimbursement fraud, it’s the deliberate act of misrepresenting, manipulating, or purposefully submitting out-of-policy expenses to obtain any personal gain at the organisation’s expense.
Expense fraud can involve different activities, such as fabricating expenses, inflating an expense cost, submitting duplicate claims, or even claiming personal expenses as business ones. However, it’s important to distinguish between expense fraud and simple errors in expense reports.
Finance professionals need to be aware of the complexities of expense fraud and how it might look so they can apply effective strategies to mitigate the issue.
Errors can often happen due to misunderstanding of the organisation’s expense policies, typos or accidental mistakes in data entry or a lack of proper record-keeping. While errors and fraud can impact the company’s financial health, the intent of the action is quite different. When employees commit expense fraud, they’re deliberately trying to gain financial benefit, whilst errors arise from unintentional mistakes or lack of knowledge.
How can expense fraud impact an organisation?
Expense fraud has been a hot topic over the last few years in the corporate world as more and more cases are unveiled and discussed in the media. In October 2023, it was discovered that Amazon had reimbursed an employee over $350,000 in non-existing meals and other expenses. According to the FBI investigation, these expenses for the Escape Velocity event were incurred during the pandemic, when all events went virtual.
According to Cifas, a UK fraud prevention service, the number of cases reported for fraudulent conduct rose by 38% during the first nine months of 2023. And while these numbers keep increasing, the companies face the consequences of these behaviours, extending far beyond simply losing money.
Accurate financial information is key for investors, and if they encounter a history of internal fraud claims, they might lose their confidence in a business.
When an organisation faces fraudulent expense claims, it creates a ripple effect of negative impacts that affect various aspects of the company’s well-being. Financial losses are, of course, one of the biggest issues. As stated per the Report to the Nations study published in 2022 by the ACFE, it’s estimated that organisations lose around 5% of their revenue to fraud each year, putting the average loss per case at over $1,7M. These costs account not only for the direct reimbursements of the fraudulent claims but also for the administrative costs and increased insurance premiums they face after the incidents have been uncovered.
The organisation’s reputation also suffers the impact of expense fraud. Customers are less willing to trust a company that incurs fraudulent practices, and potential talent might not be so inclined to work for a company they might consider dishonest. Furthermore, investors might refrain from looking into such organisations. Accurate financial information is key for investors, and if they encounter a history of internal fraud claims, they might lose their confidence in a business. This will inevitably impact the organisation’s access to capital, ability to raise funds, financial health, and long-term growth.
Most common types of expense fraud
Fabricated Expenses
Essentially, fabricated expenses means creating claims for expenses that never existed. It’s the most deliberate form of expense fraud, not to be confused with human error, as employees go to great lengths to succeed and conceal their actions, such as making up fake receipts.
Although these are rare in the corporate world, the potential for consequences is quite high for both the employee and the organisation. For the company, if fraud is picked up during external or tax audits, it can lead to adjustments in the financial statements and fines, whilst employees can face termination for cause and even legal charges.
Inflated Expenses
Inflated expenses involves deliberately overstating the actual cost of a legitimate expense. This can range from exaggerating the cost of meals and travel, adding fictitious charges to receipts or submitting personal receipts at inflated amounts.
Inflated expenses can happen due to human error, such as mistyping. But when those expenses constantly surpass the limits set by the internal policy, it can quickly turn into deliberate inflation, crossing the line into expense fraud.
Personal Expenses
Claiming personal expenses as business costs, similar to fabricated expenses, falls into deliberate deception. Unlike human error, where forgetfulness or misinterpretation might lead to minor inaccuracies, this type of fraud involves consciously misrepresenting the nature of an expense to gain personal financial benefit.
Employees engaging in this scheme often resort to creative methods of disguising personal costs as business needs, which can involve submitting receipts for personal purchases and claiming them as business meals or fabricating justifications for personal travel by claiming them as business trips.
Duplicated Expenses
Another form of expense fraud involves duplicate claims, where the same report is submitted multiple times to receive reimbursement more than once. This can be done electronically by resubmitting reports or uploading the same receipt multiple times.
While it can be attributed to human error, employees with multiple paper copies of receipts might attempt to submit them through different channels, hoping to bypass detection and get multiple reimbursements for the same expense.
Receipt alteration
Expense fraud can be masked as apparently harmless actions such as receipt alteration. This involved modifying existing receipts to inflate the claimed amount or sneak in unapproved expenses.
An employee might physically manipulate a receipt by adding a few dollars to the total or digitally edit out an electronic receipt to remove alcoholic beverages, given that they’re often out-of-policy. And while it may seem insignificant, these alterations can represent a deliberate attempt to deceive the organisation.
How can organisations defend themselves against expense fraud?
No doubt, expense fraud significantly threatens an organisation’s financial health. And even though data shows it tends to increase, the reality is that there are proactive measures that can and should be implemented to minimise this risk.
One of the first — and crucial — steps is establishing a clear and comprehensive expense policy. This policy should define acceptable business expenses, set spending limits for various categories, and outline the required documentation process. Technology is essential in combating expense fraud, so introducing smart and advanced expense management software like Rydoo will help automate expense reporting and approval processes, reducing manual errors and streamlining workflows. However, the system goes further by leveraging Artificial Intelligence (AI) and sophisticated algorithms that identify potential fraud by detecting duplicate claims and manipulated receipts, significantly reducing the risk of fraudulent activities going undetected.
Beyond the direct financial impact, expense fraud erodes a company’s reputation, impacting customer trust, attracting talent, and securing investment.
The system, powered with an advanced receipt scanner, can also identify if an expense does not align with the organisation’s internal spending policy. In these situations, the software will send a policy warning notification to warn users of the potentially non-compliant expenses before they are submitted, highlighting the problem to the approver and finance team to ensure it is properly handled.
Employee education is equally important in this scenario. Regular training sessions can educate employees on proper expense report practices, acceptable practices and the consequences of expense fraud. Fostering a culture of open communication can also encourage employees to voice their concerns or report suspicious activity they might detect without fear of repercussions.
Expense fraud, in its diverse forms, poses a significant threat to organisations’ financial well-being. But beyond the direct financial impact, expense fraud erodes a company’s reputation, impacting customer trust, attracting talent, and securing investment.
Understanding how expense fraud can present itself is the first step to developing strategies to effectively combat the issue, such as establishing clear and comprehensive expense policies that will lay the foundation for transparency and accountability. Leveraging smart expense management software like Rydoo further strengthens this defence by automating workflows, proactively identifying potential fraud through AI-powered duplicate claim and receipt manipulation detection, and flagging out-of-policy expenses through its advanced receipt scanner.
By implementing these comprehensive strategies, organisations can significantly mitigate the risk of expense fraud, safeguarding their financial health and fostering a culture of responsible expense reporting. This will protect them and promote trust and integrity, which is essential for long-term success and growth.
