This is the third installment in a series of articles describing various ways in which fraudsters are able to “game the system” at your company’s expense. In this installment, we explore different expense reporting fraud schemes that we have encountered in the course of our investigations.
The purpose of having employees submit expense reports for reimbursement of corporate expenditures is simple: it provides the company the ability to review and authorize employee spending, leaving the financial risk for improper expenditures with the employee. Similarly, companies institute purchasing controls to mitigate the risk that employees will purchase goods and services for personal use, rather than for the benefit of the company. Unfortunately, employees can become familiar with the review and authorization processes, or the people who perform these functions, and circumvent the controls you believe protect your business from misappropriation. The following serve as precautionary examples of real frauds perpetrated on small businesses.

• Vice President of Research, responsible for visiting scientists from partnering firms, submitted his travel itineraries and payment confirmation printed from the airline, hotel and car rental sites for reimbursement. In total, his trips cost the company over $20,000 in less than a year. Sadly, the VP took none of the trips, collected the expense reimbursements from his company and cancelled the reservations, collecting his original payment (less a cancellation fee) back as well. Lesson learned – Require evidence that the trip was taken (e.g., electronic check-in validation, car rental receipt from the agency and final hotel bill with final charges). In addition, use common sense – in this instance, one could have noted that no meals were ever submitted for reimbursement).

• Director of Marketing, responsible for coordinating trade shows for her company, submitted several statements from a major office supply store (which had a master purchasing agreement with the company) for approval. The Director created elaborate invoices, which closely resembled actual vendor statements using a readily-available PDF processing software program, and was able to hide her numerous purchases of gift cards. Her actions cost the company tens of thousands of dollars. Lesson learned – Especially when your company has master purchase agreements in place, but even if not, perform spot checks with vendors by requesting a history of all purchases on the company’s account(s).

• Sales manager, responsible for finding, selling and closing new business through “wining and dining” meetings, submitted regular expense reports with copies of receipts attached. The company’s policy was to collect the data electronically (rather than original paper receipts). The sales manager submitted the same receipts multiple times for reimbursement, in some instances with the same expense report, without detection. Lesson learned – Authorizing parties should inspect receipts carefully (or perform spot checks due to volume) for the same employee over consecutive months for repeat usage. Please note also that some fraudsters will submit different versions of the same transaction (e.g., detailed bill before tip, signed credit card receipt after tip and copy of credit card statement for transaction).

• Restaurant manager, responsible for both operations within the store and catering deliveries, submitted gas, servicing and repair payment receipts for the company’s delivery van. Of note, this manager also received an auto allowance meant to cover costs for any business use of his personal vehicle, should he ever have to do so. Unfortunately, the manager’s expense reports, when filed, included multiple vehicle fill-ups within hours of each other and servicing and repairs of family vehicles. In addition, as manager, he approved his own expenses and the owners were unaware of the misappropriation. Lesson learned – Business owners should establish checks and balances, perhaps even outside the chain of command (e.g., outside CPA or other trusted advisor), to mitigate the risk of an individual both requesting and approving the same reimbursement.

The above are not exhaustive, but meant to give food for thought when establishing and implementing internal controls for your expense reporting. The common thread throughout most expense reporting fraud is a lack of attention to detail and the ability of the fraudster to circumvent any controls as described above. Spot checks and independent verification of expense reports can provide not only the ability to detect ongoing misappropriation, but also serve as a deterrent to would-be fraudsters if you make it known that such procedures are in place.

If you have any questions or need assistance in a fraud matter, please call Karen Fortune at 770-635-1699 or Pat Salem at 770-635-1698. Initial consultations are offered free of charge.

Written by Karen B. Fortune, CPA/CFF, CGMA, MAcc