Clear, consistent policies best way to prevent misuse
Employee expense fraud costs organizations an average of $18,000 a year but the harm it causes goes far beyond the balance sheet, according to accounting firm Grant Thornton.
“If you’ve got expense account fraud going on within an organization and it’s not that hard for other people to see it’s going on and if nothing is being done about it, then there’s a perception that top management doesn’t care, that it’s okay. So other stuff starts to happen, inventory starts to disappear, people start walking off with the company’s assets,” said Pat McParland, a principal at Grant Thornton in Vancouver.
“It starts to tear at the fabric of the company’s ethics. It’s like wood rot, it will just eat away at your organization and, ultimately, you will have bigger frauds. Frauds frequently start small and they’ll grow.”
The typical Canadian organization loses five per cent of annual sales to fraud every year, according to a 2007 report from the Association of Certified Fraud Examiners. Expense account fraud accounts for 20 per cent, or $18,000, of these frauds, found the report.
These frauds can range from an extra $50 dinner to family vacations, said McParland. (See sidebar on page 6.) With advances in technology and the poor economy, the incidence of expense fraud could be about to increase, he said.
Gone are the days of correction fluid and cutting and pasting, he said. Scanners, colour copiers and printers make it much easier for employees to fake receipts for fictitious purchases.
And with the poor economy, people are more likely to see it as their due to skim a little from the company to help make ends meet, he said.
“We’ve just gone through this period of recession and we’re just coming out the other end right now. But there’s still a lot of fallout from that. There’s still a lot of families where maybe one of the breadwinners has lost their job or had their hours cut back, so there’s an awful lot of financial stress on family,” said McParland.
The poor economy also means many middle managers have been laid off. These people are often responsible for expense claim oversight, he said. If the person in charge has been let go or is overwhelmed with extra duties, there’s more chance of fraudulent claims getting approved.
“You combine all those factors together and you’re going to see an increase in this exposure,” said McParland.
Organizations need to create a fraud-adverse environment and set a tone from the top down that fraud won’t be tolerated, he said.
To do this, organizations need clear and detailed expense claim policies, said Lynne Poirier, an associate with the law firm Ogilvy Renault in Ottawa.
The policy should detail which expenses will be reimbursed, which are discretionary and which need to be approved ahead of time. It should also detail the names of the people who will be checking the expenses or approving them, she said.
“If it’s not specific enough, some employees can claim they didn’t understand,” said Poirier.
The policy can also require employees to explain and justify the expenses, such as who was at a dinner the employee claimed as a business expense, what was the purpose of the dinner and why it was business and not personal, said McParland.
Organizations also need to communicate the policy to all employees, said Poirier, and be able to prove employees are aware of the policy — either by having them sign a hard copy of the policy or by sending an email informing employees of where to find the policy online.
Without proper communication of the policy, “it will be very difficult for employers to rely on it,” said Poirier.
Organizations also need to consistently enforce the policy. If managers start to make exceptions, they’ll just get into trouble, she said.
Once there’s a suspicion of fraud, it needs to be investigated and all the facts must be documented. The manager should present the facts to the employee and give him a chance to explain, said Poirier.
“It’s important to get the employee’s point of view and their explanation to avoid the potential for embarrassment,” she said.
If it’s determined a fraud was most likely committed, the employee must be disciplined following the guidelines laid out in the policy.
“It’s hard to include in a policy all the possible consequences for anything. But your policy should be pretty clear in stating that disciplinary measures will be applied for any breaches of the policy,” said Poirier.
The policies need to be clear that expense account fraud could result in termination, police action or litigation, said McParland.
“You have to leave yourself enough freedom to deal with each circumstance as it arises on its own,” he said.
The Supreme Court of Canada has been clear the punishment should fit the crime, said Jonathan Dye, a partner in law firm Heenan Blaikie’s labour and employment group in Toronto.
“For the most part, for something like fraud, the punishment is going to be severe,” said Dye. Where it can be shown there was an intentional and substantive fraud, it should be written into the policy termination will be the only appropriate consequence, he said.
However, if it was a matter of an employee not getting the right approval for a legitimate expense, the organization should use progressive discipline and start with a verbal warning, he said.
A common mistake organizations make is relying on financial audits to uncover fraud, said Dye. Financial audits review the books and can only uncover a fraud if the numbers don’t balance.
“But it’s perfectly possible the books balance perfectly well and there’s been a massive fraud. It’s just that they’ve filled out the accounting records properly,” he said.
One of the best ways to catch employee expense fraud is through anonymous tip lines, said McParland.
“They work really well,” he said.
Forty-two per cent of workplace frauds are detected through tips, 20 per cent are detected through internal and external audits and 19 per cent are detected by an organization’s internal controls, according to the Association of Certified Fraud Examiners.
Fraud hotlines are very common in municipalities across the United States and in recent years, several municipalities in Canada have followed suit, including Toronto, Edmonton, Calgary, Ottawa and Windsor, Ont.
Types of fraud
4 ways employees cheat on business expenses
Expense account fraud is any scheme where employees claim reimbursement for fictitious or inflated business expenses. It tends to manifest in at least one of four ways:
• Employees claim reimbursement for personal expenses by mischaracterizing them as business-related expenses. This can range from a dinner bill to a personal vacation.
• Employees inflate the amount of actual expenses and pocket the difference.
• Employees “double dip” by claiming legitimate expenses more than once.
• Employees submit fake expenses by claiming reimbursement for purchases that never took place or by manufacturing bogus receipts.
Source: No Free Lunch, Grant Thornton
