Expense Reimbursement Fraud

According to the 2014 Report to the Nation on Occupational Fraud and Abuse, published by the Association of Certified Fraud Examiners (“ACFE”), employee reimbursement frauds were present in 13.8% of all asset misappropriation cases reported. These cases resulted in a median loss of $30,000 per scheme with a median detection time of 24 months. Understanding the nature of reimbursement fraud and improving controls can help prevent and detect these costly schemes.

Definition

Expense reimbursement fraud is defined by the ACFE as a fraudulent disbursement scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expenses. Many companies entrust the employees with self-reporting of business expenses for reimbursement. Without proper controls and checks, this process affords each employee with the opportunity for fraudulent behavior which can go undetected for a lengthy period of time. In addition to the initial financial loss, these fraudulent acts impact the items recorded on a company’s financial statements, which can result in a misstatement and further problems. 

Types of Expense Reimbursement Fraud

Expense reimbursement fraud is categorized in 4 typical forms:

1. Mischaracterized expenses: Perpetrators submit expenses which do not qualify for reimbursement under company policies.
2. Overstated expenses: Perpetrators request reimbursement in excess of actual costs, typically through manipulation of receipts or mileage records.
3. Fictitious expenses: Perpetrator submits expenses for reimbursement which were not incurred.
4. Multiple reimbursements: Perpetrator submits the same expense for reimbursement multiple times. A variation of this fraud involves submitting to the company for reimbursement the same expense that was already reimbursed by an external organization.

Prevention & Detection

A formal reimbursement policy and strong internal control regarding the reimbursement process can greatly reduce the risk of reimbursement fraud. The policy should have clear and detailed guidelines regarding reimbursement and well-defined roles and responsibilities for those employees involved in the reimbursement process. Small businesses can benefit from formalizing their policies and roles, as many have no policies or inadequate policies in place, resulting in increased susceptibility to reimbursement fraud relative to their larger counterparts. 

The American Institute of Certified Public Accountants (“AICPA”) identifies these additional tips for the detection and prevention of expense reimbursement fraud: 

• Require detailed receipts, including documentation of the business purpose of the expense.
• Require that meal and entertainment receipts include the number and names of attendees.
• Ensure that employees’ supervisors review and approve all expense reports prior to payment.
• Establish a policy for approval of executive management expense reports (some organizations require approval by a board member).
• Attach conference schedules to expense reports, as applicable.
• Use standard daily per diem rates for meals and incidental expenses.
• Establish budgets for travel and entertainment expenses by person and level, and perform budget-to-actual reviews of travel and entertainment expenses for each employee at least quarterly.
• Compare the dates expenses were incurred with employees’ work schedules.
• Verify appropriateness of mileage claimed for employee trips via an Internet map program.

Conclusion

Employee reimbursement fraud is a one the fastest growing areas of occupational fraud. Reimbursement fraud is a scheme that is often difficult to detect and can be perpetrated by nearly every employee at a company. Following the strategies outlined above, including the implementation of a formal reimbursement policy, can act as a major deterrent and prevention mechanism for this type of fraud.