Expense fraud is one of the most pervasive types of fraud in an organization. According to the Association of Certified Fraud Examiners (ACFE), 13.8 percent of fraud schemes involve expenses. The median loss for organizations that are victims of expense fraud is approximately $30,000.
To avoid these types of frauds, organizations generally hire a team of auditors who are tasked with analyzing every single expense report. They would examine line items and manually cross-reference all receipt information from third-party data sources and other internal organizational sources to validate their legitimacy. They would also check for mislabeled items, out of policy purchases, and duplicate expenses across employees and reports.
Even after doing all the above things, we have found that human audits consistently seems to overlook these following type of expense report misconducts:
Multiple reimbursements: These charges heads the list of the most common type of expense report misconduct because it is so hard for any human auditor to capture these over a long period.
For example, an employee might file an expense in January and then file the same expense in June as well. The human audit process does go back to comb through previously approved expenses as it would add to the already time-consuming process and employees are aware of this information gap.
Overstated expenses: This is an especially difficult subset of expense report tracking for human auditors. For instance, in cases of mileage padding, it’s a challenge to validate mileage claims if the organization lacks GPS tracking capabilities. While opportunistic employees likely can’t make a fortune padding their mileages, the threat of long-tail leakage for companies is worthy of concern.
Fictitious expenses: These are bogus receipts that appear genuine. Computer programs, design skills, and even legitimate companies make it easy to create fake documents. For instance, the case of unused airline tickets where the malfeasance begins when a ticket is booked for a business trip that subsequently gets canceled or postponed. The employee then books and expenses a second ticket instead of paying much less to cancel or rebook on the first one, thereby handing him a free airline trip on the company’s dime.
Mischaracterized expenses: Employees submit personal expenses under the category of business expenses. Such sort of mischaracterized claims is common as there is usually no way of categorizing a claim by only looking at the submitted receipt.
Common schemes include staying at an inexpensive hotel while claiming that you stayed at a more expensive hotel on your expense account; claiming that you stayed at a hotel when you did not; Other types of fraud could include sending out large bundles of laundry to be dry cleaned although the business trip is only one night, or adding incidentals such as pay-per-view or massages even though company travel policies do not cover those.