You spent how much?

Entitlement, opportunity, pressures can lead to expense fraud: Experts
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 05/06/2014

The headlines pop up often and have a familiar theme: “CBC president Hubert Lacroix repays $30K in expenses,” “Brampton mayor Susan Fennell defends $50,000 airfare expenses” and “Former general says attacks over moving expenses a ‘smear campaign.’”

Whether it involves extravagant travel or inappropriate purchases, expense mismanagement can put executives in the public and private sector in the spotlight. And while they often claim ignorance or innocence, the damage to reputation — for the employee and employer — can be severe.

So employers are responding. Whether because of tighter budgets, the power of social media or a change in focus, expense management is more in the spotlight these days, according to the experts.

In lean times, companies are trying to watch their bottom lines while new rules around bribery and corruption — with hefty fines and sanctions — also have employers on edge, according to David Meadows, associate partner in fraud investigation and dispute services at EY in Toronto.

“We’ve definitely seen an uptick in activity from our clients wanting to take a look at their employee expenses that are being submitted to the company for reimbursement.”

In the past, relatively little attention was paid to travel and entertainment costs because they typically make up a small part of the company’s budget, unlike the purchase of capital equipment or large investments, said Rob Shull, vice-president of MDD Forensic Accountants in Toronto.

“We’re hearing more about it now than we may have in the past because as controls in other parts of the organization tighten up, you’re kind of left with the things that are more easily committed, which are expense report fraud.”

Companies are starting to look more closely at their costs and are noticing more of this type of wrongdoing, he said.

“Employees, similarly, feel that maybe they have not received a bonus or they might not feel they’re being compensated fairly or they’re working harder for the same salary, so they’re looking for ways to get a little bit more out of the company.”

With executives, expense errors can be more newsworthy or sensational because they tend to be higher paid, so it seems even more unfair — and hard to understand — when they cheat, said Shull.

“Executives tend to represent the company more so when there is a fraud like that, it does have a real impact on the reputation of the organization from the public standpoint.”

The public is looking for signs of waste, especially if a company is not doing well, said Kelly Ohayon, vice-president of consulting and deals at PwC in Montreal.

“And with social media... it goes really, really fast and it can get blown out of proportion quite quickly, so a lot more companies, being aware of that and conscious of that, are really tightening up this area of the organization.”

Rationalization, pressure, opportunity

But why are there problems in the first place? Expense fraud comes back to a triangle of activities, said Meadows: rationalization, pressure and opportunity.

“So if the policy has holes in it or ambiguity as to what is acceptable or if the tone at the top of the organization is ‘We do whatever’s necessary to get the business’ or ‘Yeah, but that’s OK because that’s the way we do it here’… then that presents opportunity.”

Pressure to commit wrongdoing can also occur if individuals are feeling particular stresses, whether that’s from a divorce or the need to reach sales targets, said Meadows.

“They may get to a point where that pressure gets severe enough that they can then rationalize submitting the expenses and being able to augment their income through this.”

Rationalization also comes into play when people talk about entitlement, he said.

“We see that many times, where it’s ‘Oh, the company’s not paying me what I should be paid, I’m not getting paid what I’m worth’ — that’s a common rationalization.”

A sense of entitlement can definitely affect executives if they’re going through cost-cutting measures, said Shull.

“They are certainly making more money than a lot of the lower-level employees but oftentimes what we’re seeing is their salaries or their bonuses have been reduced, so they feel that maybe travel is one of the perks of their employment, so they should be entitled to business class or an even nicer restaurant than company policy might allow.”

However, a board of directors often pre-approves certain expenditures for the C-suite, said Ohayon.

“In most cases, you would find it’s been approved by the board and there was legitimacy behind it,” she said.

“If somebody feels that an expenditure is excessive, maybe the company does not have the right policies but it does not mean that the individual did anything wrong. And this is why companies are tightening this area of the organization.”

The weaker links often come where expenses are a little more discretionary, said Ohayon.

“When you get to the executives, they have a bit more leeway just because of the role that they play in the organization, and this is why we really encourage and we see the recurring quarterly review of executive expense accounts.”

Best practices

Companies should have travel and entertainment policies around expenses, along with a delegation policy around approvals, and pre-approvals for certain travel, she said.

Employers should also make sure mechanisms are in place to monitor compliance with those policies — either through an internalized function or external help doing periodic audits — and supervisors are diligent in approving claims.

It all comes back to the expense policies and whether there is any ambiguity around the rules, said Meadows.

“What are expectations of the employees — from the lowest-level employees all the way up to the CEO of the company — and how is that information communicated to the employees? Is it commonly available on the Internet, is there online training on it, is there any type of annual compliance signature required, during the annual review procedures or otherwise, where you can add it to their file?” he said.

“A lot of times, just that process alone will put second thoughts in people’s minds about committing potential expense fraud.”

A two-step approval process is also a good idea, with a manager looking at the expense from a business standpoint and then an internal audit or HR looking at whether the rules are being followed, said Meadows.

“It’s very tricky, especially for a manager, if they’ve got a lot of reports, to go through every expense claim and look at not only is this a legitimate business expense but are they following the rules? That person won’t get anything else done.”

The best people in a position to commit wrongdoing are often those who are the most trusted. And it’s difficult for lower-level employees to challenge the questionable claim of a more senior person, said Shull.

“To minimize the risk of fraud in this area and other areas, it’s important to really to do a fraud risk assessment to understand where your risks might be, and then to make sure you have policies and procedures in place that really do address the high-risk areas,” he said.

“And making sure your executives are subject to the policies and procedures, that will minimize that risk as well, and they don’t override the policies by virtue of their position.”

Another effective way to know what’s going on is to have a whistleblower line or some other anonymous method where workers can voice their concerns, said Shull.

But, overall, employers must make sure the policies and procedures are well-communicated, he said.

“Ultimately, you have to communicate those policies and make sure that people are aware so you can eliminate the defence of ignorance.”

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