Deterring Fraud with Tighter Controls and Enhanced Visibility
Employee-initiated spending, including travel and entertainment (T&E) expenses can create numerous opportunities for fraud, from minor infractions of a company’s travel policy to major misappropriation of funds. On demand expense management solutions offer significant opportunities to drive policy compliance and deter fraud or, at a minimum, more easily detect fraudulent activities if they occur. An organization’s expense management system should provide the most accurate, reliable, and complete data available in a timely manner giving financial managers actionable intelligence to support better informed decisions around policies and internal controls. On demand expense management solutions can provide a comprehensive view of expense and travel data across the enterprise – what expense management industry leaders are now calling ‘unified insights’. Unified insights not only help organizations reduce the risk of fraud, but support strategic planning and fuel healthy growth. This article will answer the following questions about deterring fraud and driving policy compliance:
An astronomical $652bn is lost annually by US businesses to fraud. Median losses range from $150-$190m, and in more than 40% of fraud cases, not a penny is recovered.1 While there are many types of fraud schemes, recent reports indicate that at least 21% of a company’s fraud is related to expense reimbursement.2 Compounding the problem, a surprising number of business travelers (25%) admit to booking travel outside of company policy, and although not every unauthorized expense constitutes fraud, there can be a fine line between out-of-policy spending and fraud. In fact, 20% of companies say that it is common for travelers to file reports that include completely false expenses.3
While the financial losses are significant, they only represent part of the compliance picture. Intense IRS scrutiny and rigorous Sarbanes-Oxley (SOX) requirements mean that companies must be above reproach when it comes to their internal financial controls.
Opportunities for expense fraud abound. The gap between policy and behavior can be significant, especially when inadequate controls make enforcement difficult. Yet, complex approval hierarchies and control processes can complicate the expense reporting process. Auditing is necessary, but it’s a tedious, low-return activity, and internally conducted audit processes are not always above reproach.
The challenge for the majority of organizations is to streamline the complete expense reporting and management system while ensuring a tight control environment and access to the most reliable or ‘indisputable’ data. While reducing the risk of fraud is clearly about saving costs, fraud detection and reduction should also, ultimately, be about turning a business processes – expense reporting and management – into an asset to support mission-critical plans and activities.
The single most important factor for any business in exerting tighter controls, driving compliance, and reducing the risk of fraud is visibility. The most effective way to achieve the highest level of visibility is to document, standardize, and communicate policies, automate processes, and aggregate data for review and analysis. A comprehensive view of all expense and travel data will give organizations the information they need to identify problems, refine policies, drive compliance, and support better decision-making and strategic planning.
As businesses strive to gain control, reduce the risk of fraud, and increase compliance, it’s critical to be mindful not only of the magnitude of fraud, but of the variety and intricacy of the types of fraud linked to T&E.
Organizations of all sizes and types are vulnerable to fraud. Median losses are actually somewhat higher in small businesses, in fact, than in large ones. Collectively, US organizations lose approximately 5% of total revenues every year to fraud, a significant portion of which results from expense related incidents.4
Common T&E reimbursement schemes include activities that occur at various stages of the expense reporting and reimbursement cycle and include:
Ticket exchange schemes – the employee purchases an airline ticket for a trip, exchanges it for a lower-priced ticket and pockets the difference; or the employee purchases a ticket and requests reimbursement for a trip not taken.
Mischaracterized expenses – the employee falsely claims a personal expense as a business expense or claims another employee’s purchase as his or her own (a meal, parking, taxi ride, etc.), or attempts to circumvent spending limits by deliberately miscategorizing an expense.
Overstated expenses – the employee falsifies the amount of an item, especially common when receipts are not required or missing.
Multiple reimbursements – the employee files the same item on different reports over time, sometimes to multiple approvers.
Fictitious expenses – the employee fabricates completely false expenses.
It is worth noting that 18 months is the median length of time it takes to detect fraudulent activity and that in more than 25% of cases, fraud is discovered by accident.5 Companies that rely on an on demand expense management solution, with its proactive approach to fraud detection, will certainly have an edge when it comes to curbing this type of activity.
Given the enormous potential for fraud and the scope and magnitude of T&E fraud schemes, businesses must seek an expense management solution that supports their global T&E policies, creates the tightest controls across the enterprise, provides real-time access to indisputable data, offers sophisticated reporting and analysis, and can conduct third party audits based on the organization’s needs and criteria.
A fully automated, best-in-class on demand expense management provider will help an organization identify fraud as an integrated component of the complete expense management cycle, which should include:
The expense management life cycle consists of a series of interrelated steps and processes. Businesses should expect their expense management provider to integrate tools and mechanisms for fraud detection and deterrence into every phase of the cycle.
It is a commonly accepted business practice for every organization to conduct regular random audits of a sampling of expense reports.6 Nevertheless, an audit conducted in-house can never be considered completely objective as the opportunity for collusion is always present. Only a third party audit can ensure the highest level of objectivity. Businesses should seek a provider who offers a variety of options for receipt submission, including fax submission, and who takes control of physical receipts to validate authenticity and conduct both random and targeted audits (based on dollar thresholds, receipt type, C-level employees, etc.) in keeping with an organization’s parameters and needs. A provider with a powerful audit selection engine will conduct the complete review and send companies only questionable claims for action. An automated on demand solution allows finance and accounting staff to focus attention only on suspicious claims, which increases efficiency and productivity and provides the most reliable and objective data and analysis.
Many companies report that policy enforcement is one of the most problematic areas of expense management. While some travelers do ignore the policies, many employees are simply unaware of the formal policies their companies have in place.
To develop more effective policies and increase awareness of expectations around T&E, companies should:
A surprising number of employees admit they don’t know if their companies use a designated travel management company or preferred vendors, and many say they aren’t sure which components of the policy are merely guidelines, rather than hard and fast rules. Specific and frequent communication, along with support from company leadership, will help set the record straight, reduce the risk of fraud, and drive compliance.
As organizations become increasingly multi-national, multi-divisional and complex, the need to tighten controls also increases. While our complex global business environment brings new opportunities for fraud, we now have powerful mechanisms and solutions to reduce risk and improve compliance and configurable solutions that can be structured to accommodate global needs and to aggregate data from disparate sources.
With impressive and measurable improvements in efficiency and productivity in recent years, businesses are now focused on healthy growth. Superior fraud detection tools support that drive for growth by freeing companies from the heavy burden of manual control activities and by giving companies the data to help achieve unified insights – the comprehensive view of expense and travel data needed to better manage the business.
Aggregating and analyzing employee initiated spend data from disparate sources – expense reporting, travel management companies, corporate cards – will enable companies to think strategically and work proactively. A complete, fully automated on demand expense management solution is essential to optimize internal controls, achieve unified insights, and re-focus resources, time, and attention on the future.
An international industrial manufacturing giant with more than 200,000 employees in 50 countries wanted a new approach to T&E fraud and compliance – deterrence, not detection. By integrating internal financial systems and technologies with the receipt and audit services provided through their on-demand expense management solution, the company has reduced annual T&E fraud of more than $900,000 to zero.
“Without a doubt, we are changing the culture,” a company leader reports. “We see occurrences of policy violations diminishing over time. That’s more important than dollars. That’s really our focus and emphasis: adherence to not only T&E policy, but to our code of conduct and ethics policy.”
The company’s expense management provider offers an objective third-party audit. Expert auditors and auditing processes manage and track receipt validation, policy violations, missing approval signatures, data entry errors, correct application of rewards programs benefits, matching dates, incorrect expense classification, among other components of expense reporting. The fees the company pays for these audit services are well below the average electronic processing cost cited in a recent study by the Aberdeen Group, and the savings have been astronomical.
12006 ACFE Report to the Nation on Occupational Fraud & Abuse, Association of Certified Fraud Examiners, 2007.
2Fraud Examiners Report, ACFE, 2006.
3‘Tracking: How Corporations are Cracking Down on Expense-Report Abuse,’ T&E magazine, February 2006.
42006 ACFE Report to the National on Occupational Fraud & Abuse.
52006 ACFE Report to the National on Occupational Fraud & Abuse.
6‘Automation Enables Expense Reporting Auditing Variety,’ Business Travel News, February 2006