Expense Report Fraud


The dreaded expense reports. Employees hate preparing them. Companies hate reviewing them. They seem to be painful for everyone involved, yet companies can’t get away from them all together.

You’re asking yourself why this might be an important topic. Expense report losses are really a minor expense for most companies, aren’t they? Yes, they are.

However, the problem with them is what they stand for in other areas of the company.

Cheating on expense reports is one of the most common thefts perpetrated by employees. While the amounts lost to expense report abuse may be small, condoning this unethical behavior can lead to bigger problems.

The Schemes
Probably the most common way of cheating on expense reports is by claiming items for which an employee is not entitled to reimbursement. Companies typically specify certain items that are not reimbursable, so an employee who wants to be reimbursed may mischaracterize the item in order to avoid scrutiny.

Companies may also set limits on the dollar amount that will be reimbursed for some items. If an employee exceeds the allowable amount, sometimes she or he will split the item into two parts so that the smaller items fall under the predetermined threshold.

Another common way to cheat on expense reports is inflating a bona fide expense. This might include adding on tips that were never paid or expenses that were never really incurred. Some companies specify maximum meal reimbursements, and if a receipt is not required, employees may claim the maximum amount even if a meal did not cost that much.

I worked a case where a highly compensated executive regularly lied on his expense reports. When all was said and done, I was most entertained by how he claimed taxi rides. He would change a three dollar cab ride to an eight dollar ride, profiting five dollars. He’d add a one in front of a six dollar taxi fare to profit ten dollars.

The fact that a well-paid executive with nice perks had to steal such petty amounts was amazing to me. In hindsight, however, it is not all that unbelievable. He was stealing from other areas of the organization, and this minor theft was consistent with his attitude toward the organization’s money.

Double billing for expense report items is probably the most costly of the normal reimbursement schemes. For example, an employee has a duplicate receipt for a dinner and submits the duplicate a month after the original receipt was submitted. An even trickier way of committing this fraud is using the company credit card, for which the company pays the bill. Then the employee submits the actual receipt for reimbursement on the expense report. The company already paid the bill and also “reimburses” the employee for the meal.

Other schemes include expensing personal items as if they were business expenses, and these can get costly. These include things like expensing personal vacations as business trips, submitting personal purchase of computer equipment for reimbursement, and claiming landscaping costs on a personal residence as a business expense.

Why Does It Matter?
At the end of the day, expense report theft generally remains an insignificant part of a company’s financial picture. For this very reason, it is easy for companies to ignore the problem. It probably costs more to investigate the problem than the direct cost of the theft. Yet business owners and executives should not lose sight of the fact that the expense report theft can have larger indirect effects.

Some companies have employees who knowingly, deliberately, and publicly inflate their expense reports. In some companies, this is just how business is done. But what does that say about unethical behavior in general?

I think that it says a lot. It says that the company is willing to overlook bad behavior on the part of employees and executives.

You may not agree with me. You may think that employees can generally distinguish between a “minor” offense like inflating an expense report and other, larger unethical behavior. While I think that employees are generally able to determine what behavior is worse than others, the acceptance of one trivial theft can lead employees to believe other thefts are okay. Unless companies have a very clear line that no one crosses, how can employees be expected to independently determine whether behavior is right or wrong?

To expect that employees will use common sense and ethical tendencies to know where to draw the line on theft is unreasonable. It really all boils down to the culture that companies create for their employees, and owners and executives would be wise to create very clear expectations that apply to employees at all levels. Without this clear expectation, employees are left to their own devices, which can create confusion and discord.

Preventing and Punishing
Companies can implement expense reporting software that makes the whole process easier. Employees can more quickly submit expenses for reimbursement, and the company can more easily examine and approve the expense reports.

Computerized expense reports also give management the chance to evaluate data more efficiently, and software can help identify anomalies. Software may check for duplicate reimbursements or an unusually high number of expense report items falling just below predetermined thresholds. Analyzing data in this manner can quickly help to identify potential problems.

An easy way to help curb expense report abuse can be fixed reimbursement amounts. For example, a company might implement a policy under which airfare and hotel stays are paid via company credit card and employees are given a fixed daily amount for meals and incidentals. That fixed amount negates the need for meal receipts to be submitted and examined.

One company gives employees $100 per day of travel, and that amount is intended to cover all meals, ground transportation, entertainment, dry cleaning, or other related expenses. Management has found that everyone is happier under this arrangement. Employees are happy because their receipts aren’t scrutinized, and if they choose to have an inexpensive meal, they can pocket the leftover daily allowance. Management is happy because it cut down on the time spent reviewing expense reports and decreased the opportunities for employees to commit fraud.

What should happen, though, when an employee is caught abusing the expense reporting process? It is important to not only investigate the expense report fraud, but also to investigate whether other frauds might be perpetrated by the same employee. Expense report abuse can sometimes be what I call an “introductory theft,” in which the employee is essentially testing the system to see if anyone is going to notice the behavior.

If the person abusing the expense reports has subordinates, it may also be wise to examine activities within the department or division. Are subordinates engaging in expense report theft too because they know their boss got away with it? Could there be other dishonest behavior within the department?

After the magnitude of theft is determined, it is important for companies to carefully consider the punishment given out for expense report abuse. In most instances the total dollars stolen are immaterial to the company’s financial situation, so a minor punishment is usually given.

However, a company must consider the message that this sends to the rest of the employees. Does this indicate to them that expense report abuse is not taken seriously? Could it indicate to them that fraud in general is not taken seriously? Might a light punishment indicate to employees that they, too, could get away with stealing from the company?

It might be more appropriate for a company to focus on the behavior, rather than the dollar amount of theft. The behavior itself is unethical, and even though it may not cost a company much, management might be wise to take swift and strong action. This means that the dishonest employee receives a meaningful punishment for the behavior.

Fostering ethical behavior in a company often starts with the small stuff. As companies seriously enforce a zero tolerance policy, employees are encouraged to behave ethically in all aspects of their work. Demanding honesty in the expense reporting process is only one piece of the puzzle, but it can go a long way in setting the right tone for employees at all levels.

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