FINANCE GUIDE

What You Need to Know About Expense Report Fraud

June 02, 2020

Many commonly believe that expense report fraud⁠—or any kind of financial fraud, really⁠—happens more often in large corporations. After all, corporations have the power to make million-dollar transactions, and it would be easy for employees to quickly “mark up” a few expenses, right?

In reality, however, studies have shown that SMEs (small to medium enterprises) are more susceptible to fraud than their larger, corporate counterparts. The most recent global study by the Association of Certified Fraud Examiners (ACFE) in 2018 shows that businesses with more than 100 employees suffered median losses of just US$104,000 (approx. SGD$141,000), compared to median losses of $200,000 for companies with less than 100 employees (approx. SGD$272,000).

For many SMEs, expense report fraud is one of the easiest avenues through which an employee can illegally extract cash. The study shows that weak internal controls were responsible for nearly half of all fraud cases. Expense reports often involve small sums; and SMEs can seldom spare the cost of someone to pore through receipts, check travel bookings, etc.

To minimise the incidence of expense report fraud, here are four key things SMEs should know:

  • Difficulty in checking business card expenses can result in fraud
  • Credit card statements are sometimes used to make double claims
  • Abnormally-large purchases can be a telltale sign of fraud
  • Older employees tend to commit much more fraud than newer ones

1. Difficulty in checking business card expenses can result in fraud

One of the problems with a typical credit card is the way expenses are presented. These usually arrive in a long list at the end of the month. Most business owners are too busy to go through and verify every single item, especially as the company hires more and more people.

As such, managers are more likely to sign off without checking each expense, especially if no individual transaction is too big. This gives fraudsters a chance to put small personal expenses on the credit card —the occasional restaurant meal, movie tickets, or new shoes may end up being written off as “company expenses”.

A simple solution to this is to use a Spenmo card. Unlike normal cards, a Spenmo card delivers real-time updates whenever employees make a transaction in addition to clearer monthly reports. This instantaneous visibility over company spending reduces the need for you to pore over massive lists of transactions at the end of the month.

Customisable spending rules also allow you to tailor allowable expenses for different teams and employees. You can also control individual spending limits, and approve or deny fund requests as they’re made.

2. Credit card statements can be used to make double claims

A common trick employees use is to make an expense claim using the receipt given by a merchant, and then make a second claim using a personal credit card statement as “proof”. For example:

A fraudster spends $40 to top up the petrol in a company car, and charges it to his credit card. Later that day, he presents the petrol station receipt for $40. At the end of the month, when his credit card bill arrives, he makes a second claim on the same $40, citing his credit card statement as “proof”. While an astute accountant may spot this, a busy SME owner might not.

(It’s also easy for fraudsters to get away when caught, as they’ll just claim it was a mistake).

To prevent these situations, it’s best to avoid allowing claims to be made from personal credit cards. It will only complicate the claims process. Instead, use a proper corporate card and emphasize the fact that any and all business expenses should be made using this card. Or, use a Spenmo card that immediately uploads transaction data to your existing accounting software.

3. Abnormally-large purchases can be a telltale sign of fraud

Over-purchasing occurs when an employee buys more than is needed, claims for the full amount, and then returns the surplus for a refund. This is possible with any commodity where sellers are flexible, or in which the commodity is easily resold.

For example, a fraudster might order 100 desktop computers from a local retailer. They then claim expenses based on the receipt for all 100 computers. But after the claim is processed, the fraudster calls the seller to cancel five of the orders, and are refunded in cash by the seller. The business then ends up paying the price of 100 computers but only gets 95 units.

A variation of this is to change the nature of the purchase later, for personal benefits. For example, a fraudster might purchase one business class ticket on the company card, but later exchange that ticket for two economy class tickets (to bring along a spouse or friend).

It falls to business owners to follow-up on employee purchases to make sure they’re getting what they pay for. Spenmo uses real time analytics that can identify changes in patterns and purchases, such as notably bigger orders; this can draw your attention to possible sources of fraud.

4. Older employees tend to commit much more fraud than newer ones

Employers should not assume long-time employees are more loyal and less susceptible to corruption. The ACFE report shows that fraudsters who had been with the company for more than five years stole twice as much as newer employees. Of all the cases studied, only four per cent of fraudsters had any kind of criminal record.

SME owners should maintain a degree of detachment and skepticism when it comes to tracking expense reports; even when dealing with employees they’ve known for years. This can be painful to do, so it’s best to prevent the fraud from ever happening than to have to investigate claims afterwards.

So use a Spenmo card to control what employees can or can’t transact in the first place! Besides protecting the company finances, it helps to preserve your relationship with employees. Because when you’re forced to investigate losses, it results in awkward conversations with your employees - even if they prove innocent, they may resent your suspicion.

Track, approve, or deny transactions in real time with Spenmo so you don’t end up having to play detective later.

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