Introduction

Question: Do we do Fraud every day?

Yes, For Eg : Those who are in Job, When the Office Pen kept on table in office is kept in pocket, and brought home, Definition says that this is a known theft with intention, and that is fraud, and technical term of the same is asset appropriation

This Research Paper is concentrated on Frauds in Financial statements in Respect of Expense Accounts, Expense Accounts being a very wide term could not be summed up in totality in this research paper, therefore a concentrated effort is made for explaining Frauds in relation to those misappropriations that are related to Employee Reimbursements and thus, hereinafter in this research paper Expense Account Frauds be limited to the Employee Reimbursement Frauds

What is Expense Account Frauds

For understanding Expense account frauds, we first need to understand what the term fraud means.

Fraud can be understood as following

Fraud is the unlawful and intentional making of a misrepresentation with the intent to deceive and to defraud by causing actual and potential prejudice”

“Wrongful or criminal deception intended to result in financial or personal gain”

“Unfair advantage by unlawful or unfair means”

As stated earlier, Expense Account in itself is a very wide term, therefore, For the Purpose of limited review in this Write up, Expense account Fraud can be understood as misappropriation of organization’s assets through misrepresentation of expenses incurred or reimbursed on Employee’s declaration and submissions.

Who Commits Expense Account Frauds

Expense fraud is one of the most pervasive types of fraud in organizations. According to the Association of Certified Fraud Examiners (ACFE), 13.8 percent of fraud schemes involve expenses.

Several reports are available that states that top official treats company funds as their own personal piggy banks. Such Frauds flow from the top to bottom, About 27 percent of expense reimbursement fraud comes from employees that hold executive or upper management positions, most of the frauds are committed by those who are given the responsibility and authority to safeguard the outflow of money,

How Expense Account Frauds are done

While looking at majority of the cases of Expense Account Frauds, Expense account frauds are generally committed through following means:

Mischaracterizing expenses.

This involves legitimate receipts for non-business-related activities. If Mr. A treats his friend Mr. B to a birthday dinner, for example, that generates an actual receipt, but it shouldn’t show up on Mr A’s expense account.

Requesting multiple reimbursements.

This is a riskier scheme, but just as simple. If A wants company to pay for B’s birthday dinner twice, he can just copy the receipt and turn it in on another expense report. Worse, he can attempt to be paid once for the bill, once for the receipt and once for the credit card statement.

Overstating expenses.

When people overstate expenses, they request reimbursement for more than they spend. Changing a 3 to an 8 or a 1 to a 4 on a receipt is one popular approach.

Inventing expenses.

This is probably the easiest way for an employee to get you to foot more than your share of the bill. All A needs to do is ask a taxi driver/petrol pump attendant for an extra receipt, fill it out with the numbers of his/her choice and turn it in for reimbursement.

Where Expense Accounts are committed

MEALS AND HOTELS

Fraudulent hotel or meal expenses are a common type of expense fraud.

Swap the Stay

Staying at an inexpensive hotel while claiming that you stayed at a more expensive hotel on your expense account let the employee eats up the trust value that an organization places on its employees

Extend/Create the Stay Virtually

It is generally observed that employee do plan for an early check in or a delayed check out to include that one extra day in his/her reimbursement bill

Claiming that you stayed at a hotel when you did not makes the company to pay for that expense that didn’t even incurred on the part of the employee

Doubling up the Data

Asking for double receipts from restaurants and submitting both for reimbursement is not so common, but fraudster employee don’t hesitate to do so, in this act of fraud, it is quite common observation that at every trip, bills of the same hotel are submitted for reimbursement.

Inflated Incidental Expense Bills

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. Employees are able to achieve this fraud with falsified receipts or by turning in double receipts if they know the supervisor does not pay much attention to expense reimbursements.

The Way out

To stop losses occurring from such frauds, a practical and updated travel policy should be adopted and clearly communicated to employees, In case of recurring trips, an estimate per day can be drawn and that amount can be fixed for the future travels to that place,

A well defined penal clause in case of misrepresentation of such bills can be communicated to maintain strict attitude towards such frauds

TRAVELING AND CONVEYANCE EXPENSES

Fuel reimbursement fraud

In case of Employees using their own cars, Fuel Reimbursements are made on the basis of meter reading or the petrol pump receipts, However in this case, it is difficult to estimate the personal use of the car by the employee. Employees submit all petrol pump receipts or even inflate them, resulting in higher reimbursement

The Way out

Ways of detecting potential fraud is by examining past fuel reimbursements and seeing if there are any clear and unexplained deviations.

TAXI / CONVEYANCE FRAUDS

Blank Receipts – It is quite common for taxi drivers to provide blank receipts or to compromise on the amount filled on the receipt as compared to actual billing. This Practice is persistently followed to do frauds in terms of inflated taxi bills

Upgrading the Conveyance

Sometimes employee, just to have fun, upgrade their conveyance to a higher category without authorization.

The Way out

Some ways to prevent these activities include using company-arranged rentals and/or establishing corporate accounts with certain taxi companies, as well as arranging for a direct billing process.

AIR TRAVEL EXPENSE FRAUD

Cancel and Claim

What most of the organizations reimbursement policy requires is a Travel Ticket, Employees take benefit of this weakness in Internal Control, They book a ticket at higher price, and keep the copy of the Original Ticket with them, then the ticket is cancelled, and when a cheaper price ticket is available, the ticket is booked again. This transaction helped the employee to earn the difference between the two prices less nominal cancellation charges, if any

Upgrade without Authorization

Another common way of committing air travel fraud is purchasing a coach class ticket with your credit card but submitting expense reports for a first-class ticket and pocketing the difference.

The Way out

  • Cross checking flight details with other documents like boarding pass, airport parking ticket, baggage slips etc. and
  • Double-checking the booking with the airline in case of suspicion
  • Asking the employees to use only the company’s mail id while booking tickets
  • Asking for the receipts and the boarding passes for clearing the reimbursement.

CLIENT ENTERTAINMENT

Often Marketing employees are allowed to treat their clients over lunch/dinner in lavish hotels and offer them gifts or other benefits, this allowance is used as a trick to defraud the organization by placing bills of personal nature with the reimbursement sheet as client’s entertainment expenses and this is a persistent practice in the industry to include small personal bills or to inflate the bills of genuine meetings to earn a few extra bucks

The Way out

To obtain a detailed report of the meeting of the cross checking the same with the expenses so claimed can serve as deterrent to claim inflated amounts or fake bills

Why Expense Account Frauds are Committed

Expense Account frauds can be easily understood by understanding the matrix of fraud triangle

A Fraudster is encouraged to do a fraud, if the situations as described in Fraud Triangle are present at time of fraud, Lets understand why an Employee commits a fraud

PRESSURE

Introspection of why a fraud is committed or what is the initial reason behind the person to commit a fraud takes us to the answer of Pressure, A pressure can be further explained as follows

Financial Pressure –

An Employee with Major bill pending, some high amount Loans or debt or a simple greed to accumulate wealth creates pressure on employee to commit fraud

Personal Pressure

Anti – Social habits like Gambling or Excessive drinking place an employee in a position where he thinks it alright to do a fraud

Work Related Pressures

Pressures at work place such as overworked, underpaid, or being passed over a promotion can be factors for an employee to commit a fraud

OPPORTUNITY

Second in Line comes the opportunity, A pressurized employee when gets an opportunity is more vulnerable to a fraud than an employee who works at such an organization where opportunity to do a fraud is not available.

Internal Controls

Weak Internal Controls or non-existence of internal control policies in terms of reimbursement or other expenses related outflows opens up an opportunity window for an employee to commit fraud.

For Eg, When in an organization, where CCTV are there, A fraudster will not be attracted to lift an asset or security document, however in a secluded place, it may be attractive to lift the same.

A company with weak internal control gives room for occurrence of frauds.

Trust

Sometimes Blindly Trusting an employee provides the person an opportunity to defraud the organization as and when some pressure as aforesaid occurs and the probability of fraud by trusted employees is higher as compared to what is believed.

JUSTIFICATION/RATIONALIZATION

It is a state of mind, that allows a fraudster to term the act of fraud as correct, However Rationalization of an event has two parts, Pre Facto and Post Facto, after the occurrence of the act or before the act.

Pre facto rationalization is necessary to prove a fraud and not Post facto.

Rationalization of an act of fraud can be done because of numerous reasons, Some of the common rationalization factors are as follows-*

  • Salary is less, I will give it back, when my Financial Situation Improve.
  • The Company is too big for my small amount of fraud.
  • Success of this company is because of my hard work and taking a bit of that success is not wrong.

Lack of ethics in organization: Management is not honest, so why should I be?

Which Controls are required for minimizing Expense Account Frauds?

STRICT INTERNAL CONTROLS

Weak Internal Controls are the basic reason behind Every Error or Fraud, Although it might be relatively easy to commit expense accounting fraud than a banking fraud, but those organizations with proper controls in place can decrease this type of fraud significantly.

Sometimes simply examining and analyzing the receipts turned in for expenses can reveal suspicious activity, such as unusual spikes in expenses or alterations in writing.

Organizations should also adopt different controls for different types of expense fraud. For instance, one way a company might try to avoid air travel expense fraud is by putting the ticket under the company’s name or asking the agency to stamp the ticket as non-negotiable, which would require the employee to get approval before changing it.

ANALYZING AND AUDITING

Auditing and cross analyzing expense reports randomly and looking for discrepancies is also a good practice companies should adopt.

Implementation of Audit Tools can help companies to maintain a continuous control over the data and possible red flags could be detected. Looking for red flags, such as comparing employee expenses for similar trips to see if one is vastly higher than the other, is highly beneficial.

CODE OF CONDUCT

The best way to address fraud is to prevent it in the first place. Organizations should develop clear codes of conduct regarding business and non-business expenses and what constitutes legitimate travel expenditures.

Receipts should be itemized so that the supervisor can determine which items were purchased.

Clear policies regarding travel will also help employees understand what is or is not appropriate. For instance, without a policy on taking a client out to dinner, an employee might choose a highly expensive restaurant or go the other way and choose a cheap restaurant that will make the client feel slighted.

Therefore, having clear policies regarding expenses is important not just for preventing fraud but also for ensuring that employees know how to spend funds when on a trip or entertaining a client.

DISCIPLINARY PROCEDURES

Clear disciplinary procedures for expense fraud can certainly reduce the opportunity to commit these actions.

One of the most important control measures is to hold management and top officers accountable for adhering to expense guidelines. The importance of this control cannot be overstated. If in an organization, a manager who exaggerated his expense reports set the tone that such conduct was acceptable. Employees may assume that it is acceptable practice to cheat on their expenses.. Management sets the tone at the top for the organization, and employees look toward their superiors as models for appropriate conduct.

Conclusion

Expense fraud may not seem serious compared to more commonly reported types of fraud such as embezzlement or theft of company funds.

However, filing phony expense reports is a type of company theft, and employees should be encouraged to see it as such. It is crucial that all employees—including top managers such as the CEO—adhere to expense accounting procedures. Their actions not only cost the firm in shareholder value but also sets a tone for other employees to view the submission of phony expense reports as appropriate.

Supervisors should have controls in place to detect fraud in general, as well as specific types of expense accounting fraud such as air travel or fuel reimbursement. Although it is often impossible to audit every employee’s expense account in a large company, randomized auditing can help to spot problems. If organizations are able to set controls that can reduce the pressures, opportunities, and rationalizations for committing expense fraud, then they will significantly reduce expense fraud in their organizations, save money, and be able to use their resources more efficiently.

The Take A ways

Organizations are not immune to fraud, despite the best policies, procedures and internal controls. One can reduce risk, however, by ensuring reimbursement policies are clear, concise, and are consistently followed and enforced.

An automated expense management system, can dramatically reduce the chances that company will fall victim to fraudulent expense report reimbursement.

Sources

Daniels Fund Ethics Initiative University of New Mexico http://danielsethics.mgt.unm.edu

PPT Presentation of Ms. Kanwaljeet Kaur at FAFD (ICAI), 99th Batch

Author Bio

Qualification: CA in Practice
Company: G A C S & ASSOCIATES
Location: New Delhi, IN
Member Since: 25 Mar 2017 | Total Posts: 5
Being a Practicing Chartered Accountant by his Academic and Professional qualification and also an Entrepreneur by his Experience, CA Vineet Singhal is providing his services in a vast range of Consulting, Management and Finance for businesses, Government Institutions and individuals. His Experience View Full Profile

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