4 Most Common Red Flags for Employee Expense Fraud
November 7, 2022
At a glance
- The main takeaway: Employee expenses are some of the most common gateways for internal fraudulent activity, but these cases can be hard to spot and investigate.
- Impact on your business: Expense reimbursement cases account for more than 20% of fraud in small businesses and 11% in larger enterprises, which means it is important to be vigilant in vetting of expenses and in investigation approaches.
- Next steps: Enlist the help of a professional team like Aprio Forensic Services to better detect employee expense fraud and ensure a smooth recovery.
The full story:
Did you know that one of the most common entry points for internal fraud is employee expense reports? In fact, expense reimbursement cases account for 20% of fraud in small businesses and 11% of fraud in larger enterprises, according to the Association of Certified Fraud Examiners.
Here are a few of the red flags to watch out for when it comes to employee expense fraud.
1. Expenses with missing or suspicious supporting documentation
Though most finance and accounting departments require substantiation for expenses, others don’t for special circumstances. For instance, if your expense policy doesn’t require receipts for expenses or explanations for the expense under a certain amount, this could potentially provide a doorway for fraud to occur. Examples of fraudulent activity may include employees claiming reimbursement for purchases they did not individually make (such as a lunch paid for by a client or a manager, or office supplies), or receipts that do not have the official mark of the organization from which they made the purchase.
If the expense is below the threshold for requiring substantiation, employees often get away with submitting expenses for purchases that didn’t actually happen. Practice due diligence when evaluating reports and follow up with employees’ direct supervisors if necessary to validate reimbursements.
2. Mischaracterized expenses
One of the most common cases of mischaracterization is when employees count personal expenses as business expenses. Sometimes mischaracterization is a simple mistake, a slip-up that can happen if the employee is in a role that requires them to travel extensively or they naturally accrue regular expenses as part of their duties.
However, there are other situations in which the intention is not innocent, meaning you need to be focused on your follow-up approach and further investigate expenses that look atypical for business purposes. Some examples of mischaracterized expenses may be airfare and accommodations for spouses or children, car rentals, expenses for family dinners or leisure purchases, such as spa or amusement park trips.
3. Expenses that violate your policy
Though some companies permit expense reimbursements for items like alcohol (for instance, the purchase of wine at a client dinner), many do not permit submissions for items like cigarettes. The same goes for items like travel upgrades, such as paying for priority boarding. These types of expenses can sneak in under the radar, since they’re lumped together with standard expense reimbursement requests for airfare and entertainment, which are necessary to the job your employees have been asked to perform. That’s why it’s important to closely vet these types of line items for hidden costs and even potential fraud.
4. “Inflated” expenses for standard items
Inflated expenses are often difficult to pinpoint because they are tied to expenses that are inevitably hard to track. For instance, an employee may seek to commit expense fraud by inflating the mileage they drove for business reasons or falsely exaggerating the amount of gas they used to get from point A to point B. In addition, an employee may pay for a meal with their credit card but use cash for the tip, and then exaggerate how much they left behind to receive a higher reimbursement. In these types of situations, remember that it’s never a bad idea to use healthy caution and follow up on expense reports that look suspicious.
The bottom line
If you feel that your organization has been a victim of employee expense fraud and you need help investigating the matter further, it never hurts to enlist the help of an expert. At Aprio, our Forensic Services team members have the experience, skill set, knowledge and training to support businesses in the most challenging disputes and fraud cases, including employee expense fraud. We deliver proven computer forensics, collections, interviewing, forensic document analysis and investigative techniques to assist with determining the extent of alleged wrongful acts for internal matters.
Schedule a consultation with our team today.
About the Author
Haley Beatty is a forensic accounting, financial crime reporting expert. Her specialties include Anti-Money Laundering (AML), Know Your Client (KYC) investigation and regulatory compliance. She has advised some of the largest financial institutions in the world and led teams of 500 investigators. Haley works closely with clients to establish and advance AML compliance, monitoring and reporting programs that exceed regulatory requirements. She has experience advising a broad spectrum of financial industry clients from FinTech companies to MSBs and transaction processors.