Identifying Expense Fraud in Your Small Business

Expense reimbursement fraud is a real danger to the bottom-line of any small business, especially because it can be difficult to detect. Consider these chilling examples:

  • Between 2001 and 2003, an employee at an IT company in California charged more than $90,000 in personal expenses to a company-issued credit card. The expenses included equipment for a softball team and, amazingly, $12,900 for a tuition payment for her son’s private school. The employee was sentenced to a year and a day in prison.
  • Another employee working for a magazine company, plead guilty to grand larceny, also in part due to expense reporting fraud. The employee submitted false expense vouchers totaling approximately $500,000. She was sentenced to a maximum of five years in prison.

And these are some of just the most egregious cases. Far more often, expense accounting fraud is much smaller, and as such, much more difficult to detect. Indeed, by some estimates, more than $500 billion is lost annually by U.S. businesses due to expense reporting fraud, and in 40% of these cases, not a penny is ever recovered. On the small business level, the latest report I saw said that the average expense reimbursement fraud is perpetrated by a mid- to upper-level executive, that these schemes take an average of two years to detect, and they cost companies an average of $33,000.

Personally, I once had a client, back when I was still practicing law, who lost his business due to an internal fraud scheme that cost him $100,000.

For small business, expense reporting fraud can take a number of different forms:

  • Expense misclassification. One of the most common scams, this one involves the submission of personal expenses (restaurants, hotels, etc.) as a business expense.
  • Fictitious expenses. This might include, for instance, getting extra cab receipts, filling them out, and submitting them all. Or an employee may create a fake receipt out of whole cloth on the computer.
  • Multiple reimbursements. Here, the cheat documents the same expense in different ways, for instance, using a credit card receipt and an airline reservation receipt for the same flight in order to get double payment. Alternatively, the same receipt may be turned in more than once, months apart.
  • Ticket exchange schemes. This is where an employee may purchase, say, an airline ticket and then requests reimbursements for a trip not taken.

All of this then begs the question: What do you do? How can you spot expense reporting fraud? Here are a few tips:

  • Look for the unusual: Unusual behavior (cancelling trips) or an extravagant lifestyle (like private school!) can be a tipoff that something is amiss.
  • Work with co-workers and managers: Co-workers can be some of your best hedges against reimbursement fraud. Make them aware of it and reward them for pointing it out, and promise to keep their identity confidential.
  • Trust, but verify: If necessary, verify curious receipts with vendors.
  • Audit: Random audits are a great deterrent.

And, in the end, the best piece of advice I can give you is this: Get the right software. Top-notch software like the kind my friends here at Concur make have security systems built in and that really help ferret-out fraud.


Previous posts:


Putting the Spotlight on Expense Report Fraud How to Identify Expense Report Fraud Is Expense Fraud Affecting Your Company?


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