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Understanding reimbursement fraud and improving controls can help prevent and detect these crimes. computer forensics. digital forensics

Overcoming Expense Reimbursement Fraud

According to the 2016 Report to the Nation on Occupational Fraud and Abuse, published by the Association of Certified Fraud Examiners (ACFE), employee reimbursement fraud existed in 14% of all asset misappropriation cases reported. This was up from 13.8% in 2014. These cases resulted in a median loss of $40,000 per scheme (up from $30,000 in 2014) with a median detection time of 24 months. Understanding reimbursement fraud and improving controls can help prevent and detect these crimes.

Definition

The ACFE defines expense reimbursement fraud as a fraudulent disbursement scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expenses. Many companies entrust employees with the self-reporting of business expenses for reimbursement. Without proper controls and checks, however, this process provides employees with the opportunity for fraudulent behavior, which can go undetected for a lengthy period of time. Beyond the initial financial loss, these fraudulent acts impact a company’s financial statements, which can result in a variety of inaccuracies.

Types of Expense Reimbursement Fraud

Expense reimbursement fraud generally fits into 4 categories:

  1. Mischaracterized Expenses: Perpetrator submits expenses which do not qualify for reimbursement under company policies.
  2. Overstated Expenses: Perpetrator requests reimbursement in excess of actual costs, typically through the 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. He or she may also submit for reimbursement the same expense already reimbursed by an external organization.

Prevention and Detection

Having a formal reimbursement policy and strong internal controls regarding the reimbursement process can greatly reduce the risk of fraud. This policy should have clear and detailed reimbursement guidelines and well-defined roles and responsibilities for employees managing the reimbursement process. Small businesses can especially benefit from formalizing their policies and roles, as many have no policies or inadequate policies in place.

The American Institute of Certified Public Accountants (AICPA) identifies these tips for detecting and preventing 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 approving 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 mileage appropriateness via an online map.

Employee reimbursement fraud is a one the fastest growing areas of occupational fraud, with its impact growing significantly in just the last two years. This scheme is often difficult to detect and can be perpetrated by nearly every employee at a company. Following the aforementioned strategies can be a major deterrent to those employees contemplating reimbursement fraud.


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Shaun Maloney is a Senior Manager in EisnerAmper's Forensic, Litigation and Valuation Services Group who specializes in valuing businesses and intangible business assets, and the analysis of damages and lost profits.

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