Expense Fraud – How to protect your business

One of the most prevalent types of employee fraud is expense fraud. According to the Association of Certified Fraud Examiners' 2020-Report-to-the-Nations employee fraud costs businesses 5% of their total revenue annually and over £3.5tn worldwide. Unverifiable or inflated amounts can sometimes be the result of a simple typing error or a legitimate claim where an employee lost their receipt. 

However, there are also cases when employees intentionally submit false expense reports to artificially inflate reimbursements.

Common types of employee fraud investigated by RSM UK include staff diverting payments to their own accounts, procurement fraud and misappropriation of assets, bribery and corruption, and expense fraud such as travel and subsistence fraud.

Expense fraud generally falls into four major categories.

Mischaracterised expenses: an employee claims a personal expense for reimbursement as a business expense, such as staff entertaining being recorded as business entertaining.

• Another example includes employees on work trips who claim expenses that are not directly related to the work (but claim them as if they are).
• While these claims can be made without malicious intent on the employee's part, they are also one of the easiest ways in which expenses are inappropriately claimed from and paid by employers.

Increased expenses: an employee submits a claim for a legitimate expense but increases the amount.

• These are perhaps the easiest to commit, with some common examples including exaggerating the number of miles travelled when claiming mileage expenses; or unnecessarily purchasing first-class tickets when cheaper tickets were available.

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

• These types of fraudulent claims can be hard to detect as they involve falsifying a document. A common example includes using design software to create false receipts, or to edit receipts to show a higher price or claim reimbursement even though a refund has already been paid.

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

• Multiple reimbursements stem from genuine business expenses however, they are claimed more than once. This type of expense fraud can easily go unnoticed if a business processes these claims without a strong policy or system.

What policies are already in place to tackle expense fraud?

The government has proposed a new bill that is currently in the committee stage at the House of Lords. The ‘Economic Crime and Corporate Transparency Bill’, aims to hold companies accountable if they profit from fraud perpetrated by their employees. While some steps are in place to penalise and prosecute businesses and their employees for fraud, the goal is to close gaps that previously permitted businesses to evade accountability.

According to the new law, if a specific fraud violation is committed by an employee for the benefit of the organisation and the company does not have effective fraud prevention policies in place, the organisation will be held accountable. It is not necessary to show that company owners authorised or were aware of the fraud. Therefore, it is essential that businesses implement a well-controlled and managed system to help mitigate any penalties HMRC may levy.

Moreover, HMRC has recently increased its focus on understanding what controls businesses have introduced to limit the likelihood of fraud and error occurring. Changes to accounting regulations, HMRC risk ratings and a requirement for sign-off from senior accounting officers all mean there is now greater pressure to account for every penny that passes through the books.

A well-controlled and managed system will help mitigate any penalties that HMRC may levy, as any payments to employees that are unaccounted for could be classed as either pay or a benefit-in-kind, both of which are subject to tax and national insurance contributions as well as possible interest.

How to safeguard against expense fraud

• Defeating expense fraud starts with policy. This must be clear, simple to understand, explicit, and easily accessible. An unclear or interpretive policy leaves room for misuse. If there are stricter expectations and controls in place, employees are more inclined to spend appropriately.
• Regular auditing is crucial for identifying expenditure fraud. This can be a difficult chore. Communicate clearly at the start that any original documentation should be submitted with their expense claim or kept for a period of time. Make sure line managers or those signing off expenses are clear on their responsibilities. Routinely question expenses claimed that look unusual.
• To ensure that expenses comply with the established guidelines or policies of the organisation, it is recommended that formal review processes or spot checks be implemented by the finance department, HR or both.
• One easy but effective way of managing expense claims is to ask employees to submit their expense claims regularly.
• Ensure that all expenses claimed by senior staff and non-executives are signed off by another senior member of the team, such as the finance director.
• Be consistent with your approach when staff make expense claims. Either ask employees to pay out and be reimbursed, or the company pays the expense directly. An effective way of doing this could be corporate charge cards. This way, spending can be controlled and reviewed more easily.
• The company policy should clearly state that any offenders will be dealt with accordingly if they violate or falsify their expense claims.

Expense fraud is not always deliberate. Employees may not be aware of the company’s expense policy, or it may be because of an accounting error. However, by starting with a strong policy communicated to all employees, conducting regular reviews and random spot checks, you can help control expense claims and mitigate fraudulent activity.