Expense fraud is one of the most overlooked types of fraud and entails a staggering amount of revenue loss for companies. One way which companies are opting to address this problem and “plug the leak” of lost revenues is by using Forensic Data Analytics (FDA). Authors: Michael Faske, Madan Sathe, Madhumita Jha
Oldest white-collar crime
The oldest and most pervasive type of white-collar crime probably remains travel and expense fraud. Expense fraud is one of the most overlooked types of fraud and amounts to a staggering amount of revenue loss. According to the ACFE 2016 study, cases range from a few dollars for non-work related meals to hundreds of thousands of dollars accrued by systematic schemes over a period of several years. This type of fraud drains billions of dollars from corporations each year.
Whilst it is one of the oldest and most common types of white-collar crime, it is nevertheless one of the easiest ways to steal money from a company. Most companies´ expense reimbursement policies are vaguely written, and sometimes the only reference to the policy is denoted by nondescript written procedures in an employee handbook. 55% of employees who claim expenses are uncertain of companies’ written expense policies, even if such a policy does exist. More surprisingly, most companies design their travel expense reimbursement policies to meet audit and tax law requirements, rather than encouraging expense control or fraud prevention. Such motives frequently lead to extremely weak travel and expense control mechanisms.
While some sectors are represented more than others, companies of all sizes operating in any sectors can fall victim to expense reimbursement fraud. With only 5.4%, the Financial Services Industry has a surprisingly low frequency of fraud schemes relating to expense fraud. Technology, Manufacturing, and Healthcare were amongst the top sectors with regard to exposure to high frequency of expense fraud.
What exactly is employee travel and expense fraud?
The two primary expense fraud schemes perpetrated either involve employees claiming reimbursement for fictitious expenses or inflating actual business expenses. Inflated actual business expenses constitute legitimate expenses, but the value should not be as high as that claimed. Examples include:
- Traveling in a higher class (business or first) or taking a limousine/taxi when public transportation would suffice
- Adding tips to reimbursements when the tip was already included – or increasing the actual amount of the tip that was left
- Going to an upscale restaurant when a more modest one would have sufficed
Examples of fictitious expenses:
- Items for personal use (food, gas, hotels)
- Travel expenses that were never incurred (business trip was canceled and tickets were refunded)
- Falsifying or manipulating receipts (changing amounts, creating fake invoices, amending dates)
So what should be done?
A few suggestions that can help limit the risk of employee travel and expense fraud include the following:
- Maintain a travel and entertainment expense policy which includes details about prohibited activity and expenses. Additionally, in order to prevent the inflation of acceptable expenses, a receipt should always accompany an expense report.
- Institute meaningful expense report approvals: when it comes to fraud prevention, trust is essential in all business relationships; however, it should not be a reason to disregard control measures. For approvals to be an effective anti-fraud control, approvers must be aware of which details they must check and why. Expense management software could facilitate the approval process by ensuring that no expense that falls outside the policy could actually be submitted.
- Monitor costs / internal audit:
- If employees with similar standing and roles have significantly different spending patterns, a closer look at their expense claims may be warranted.
- Not a first-time offender? If an individual is a repeat offender, a closer look at his expense claims may be warranted.
- Setting “trip” expense claim limits rather than allowing individual expense or purchase limits will prevent employees from splitting the costs among numerous expense reports.
- Whilst company credit cards permit expert consolidation, which more easily enables finance departments to track trends and verify charges, they can also encourage employee overspending. A reasonable alternative may be a pre-paid credit card.
- Tone at the top. Despite all efforts, if management does not abide by policies and procedures, credibility and trust in the company will be lost. Wrongdoing becomes legitimized if employees witness the same poor behavior within management, or if no action is taken against policy violators. Policies must be strictly enforced.
With the advent of technology and increasing incidence and types of fraud, there has been a significant rise in the adoption of Forensic Data Analytics (FDA). FDA is used for a wide range of activities, to assist a company in monitoring, detecting, and preventing fraudulent activity. Expense fraud can be detected and even prevented through forensic data analytics’ machine learning algorithms. With little human intervention and minimal expense and effort, such algorithms are exposed to new data to spot patterns of behavior. The program can further learn to detect anomalies in the patterns, including fraud patterns which would otherwise be overlooked by human efforts.
Various forensic analytics software solutions exist, which offer great alternatives to the manual process of reviewing and monitoring expense costs. Such tools can also manage the approval steps required to validate the claim, store copies of the supporting documentation and prepare customized cost analyses. The expense management software analyses 100% of the data with which it is loaded, using advanced technologies and methodologies like document analysis, text mining and machine learning. This automated expense solution dramatically enhances control over the expense process and can minimize and even prevent employee travel and expense fraud.
When there are policies in place accompanied by an automated expense management system, the chances that your company may fall victim to expense reimbursement fraud can be dramatically reduced.
Interested in more? Forensic Diaries: A Fraud Investigation & Dispute Services Blog
 ACFE Report to the Nations on Occupational Fraud and Abuse 2016
 Research conducted by Concur UK, 2012.