The Association of Certified Fraud Examiners (ACFE) defines expense fraud as a fraudulent disbursement scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expenses.

Common types of expense fraud include:

• Mischaracterized expenses: an employee submits a personal expense for reimbursement as a business expense.

• Overstated expenses: an employee submits a claim for a legitimate expense but increases the amount. An example of this can be overstating mileage.

• Fictitious expenses: an employee submits a fake expense and/or false receipts that appear genuine for reimbursement.

• Multiple reimbursements: an employee submits the same expenses and receipts more than once for reimbursement.

The ACFE published the results of a study done in 2020 that concluded that expense reimbursement fraud accounts for 20% of fraud in small businesses; in this study a small business is considered one with less than 100 employees. These cases resulted in a median loss of $30,000 per scheme with a median detection time of 24 months. At CPA by Choice we want to share some ways to help detect and prevent expense fraud in your business.

1. Set Policies/Guidelines: Your company policies must be clearly communicated to all employees. The guidelines should include a formal reimbursement process, rules and consequences, per diem guidelines, and prohibited practices. The same reimbursement procedure should apply to all employees in the organization.

2. Establish Internal Controls: A department manager or a designated person in accounting or HR should review and approve expenses. Ensure those implementing controls understand what to look for and why. Requiring a two-step verification process of all expenses reduces fraud and also minimizes accounting errors. Encourage authorizers to question submissions and to deny expenses outside of guidelines.

3. Automate the Process: Automating solutions can prevent multiple submissions, can automatically transfer credit card expenses to travel expense report, can create an audit trail, can automate the approval process, and it allows you to set rules where expenses not meeting guidelines are automatically denied. By automating the process you will also have access to more data for audits, better control of expenses, and decreased human error.

4. Conduct Regular Audits: For all new hires a set amount of first expense reports should be reviewed to ensure they understand and are complying with company policy. All audits should ensure that proper documentation is collected to support the expenditures. Bring audit findings to employees’ attention not only to show them that expenses are being monitored, but to also help reduce any common violations. Do not wait for a formal audit to question any amount/expense that is out of the ordinary.

5. Enforce Policy: Enforcing policy is an effective internal control, it shows all employees that fraud will not be tolerated. Depending on the severity of fraud, some business owners may choose to prosecute.

There are more ways to detect and prevent expense fraud and we can help you reduce this risk. At CPA By Choice we can walk you through these processes or establish guidelines for you. We can also help you automate your systems and audit your expense practices. Having an accounting professional allows you to dedicate more time to growing your business. We are available to answer your questions, feel free to call us or send us a message.

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