Senate scandal provides lessons in expense management

Policy, procedure key to compliance, lower costs

The Senate expense scandal has filled the news of late after Canada’s auditor general looked into questionable claims by the upper house of Parliament. More recently, retired Supreme Court of Canada Justice Ian Binnie reduced the $322,611 in expenses 14 current and former senators were ordered to repay to $177,898.

While it’s a situation involving public funds, the scandal serves to highlight the challenges of expense management. 
For one, there’s the importance of policy and procedure — Binnie’s report frequently referenced Senate Administrative Rules and Senator’s Travel Policy 2012.

Travel remains the second largest expense, after personnel, in most companies and corporate travel policies still have an important place in keeping travel costs under control, according to R.J. Filipski, vice-president of business development at travel management company Concur.

“It’s important to have effective travel and expense policies in place at the company level to help to avoid unexpected costs, fulfill duty-of-care obligations to employees and to mitigate risk of fraud while supporting key business goals,” he said.

“The corporate travel environment is changing faster than ever before. Technology is giving travellers more choice in booking travel and companies more choices in how they interact with their customers and off-site employees.”

But having travel and expense policies will only work if employees can find them, understand them and use them, he said.
“Policies should be comprehensive, easily accessible via technology 24-7 and work for everyone at every level of the organization.”

As long as an employer has good policies and procedures in place, the situation can be pretty straightforward, said Scott Chambers, partner at Blumberg Segal in Toronto.

“Whenever a policy and procedure is lacking, that opens the door for ambiguities, particularly regarding expenses or any expenses, whether it’s travel or just the day-to-day expenses for the office.”

Smaller employers, in particular, often lack a written policy, which makes it most challenging, said Gaetano Gagliardi, payroll compliance advisor at the Canadian Payroll Association in Montreal.

“We always do recommend that there is a clear written policy that’s been acknowledged by employees to ensure they know what the policies around travel expenses are.”

While many smaller organizations still use a manual system, the automated ones seem to open up the door for abuse, said Chambers.

“You just submit your expenses through an automated system, it pops out a cheque at the end of the day, there’s not a human to check the actual legitimacy of expense.”

As an example, one company saw employees funneling illegitimate expenses as corporate retreats, adding up to tens of thousands of dollars. It took two to three years before they were caught and by then the damage was done, he said.
“When there’s a human there checking it, it’s a lot harder to slip through the cracks.”

The senator’s travel policy provided for reimbursement of “reasonable expenses incurred while travelling.” But “reasonable” can be a grey area as clients may be taken out for expensive meals unless there’s a policy and procedure that limits the per diem amounts, said Chambers.

However, employers shouldn’t over-regulate as the system may become too arduous to enforce and understand, he said.

“Certain jobs, a lot of sales positions, there’s that expectation they’re supposed to take clients out for meals and you kind of have to play it by ear and trust the salespeople that they’re not going to abuse the system.”

Senators were also required to “exercise due economy in the selection of travel options” but for most employers, if there isn’t that established procedure, that can be abused, said Chambers, citing one case where executives were flying back and forth to Germany in first class and though the company couldn’t afford the cost, the expenses were funneled through as no one was checking.

“You kind of have to look at ‘How necessary was the trip, was it a fundamental trip...?’ things of that nature. But most of the organizations we work with strictly fly economy and that’s the way it goes, there’s not many organizations that allow first-class travel anymore,” he said.

The way technology is now, many meetings can be done by Skype or the like, said Chambers.

“Your average PC now comes with almost everything you need to do a web conference now so you don’t need necessarily to fly there to do the face-to-face meetings anymore,” he said. 

“There’s certainly more attention given to the cost-benefit analysis of whether travel is a legitimate expense anymore… as time goes on, the costs of travel increases but the cost of technology decreases.”

But in-person meetings should not be discounted, such as with remote workers, said Gagliardi.

“Sometimes face-to-face does have an added value — you don’t want your employees to feel completely isolated,” he said. “For those that do want to do cost-benefit analysis, you have to consider that the cheapest way is not always necessarily the best way.”

The senators’ administration rules allowed senators to travel for a mixture of purposes, both personal and business, with the incremental portion attributable to the private purpose covered by the senator. That’s a common approach seen with employers.

“We’ve had a few circumstances where people have booked a business trip and then they tack on their vacation at the end of it, and that always gets into a murky area and there’s never a clear way of doing it,” said Chambers.

“I don’t fault the (employee) for wanting to do that but, at the same token, why should the employer have to foot the bill for the entire thing?” he said. “(Incremental costs) might be the way to address it, approach it on a case-by-case basis, either have a blanket policy saying you can’t have personal days tacked on or if you allow it, you assess it on case-by-case basis.”

But an employee can only make sound decisions if the employer has set clear guidelines, said Gagliardi.

“For example, for travel, an employer can say the employer will pay for the lowest cost economy fair on a flight. If an employee chooses to upgrade… and pay the difference out of pocket, that’s one thing. If the employer is paying additional fees that are considered not reasonable, that would be more of personal nature, that where it gets a bit tricky.”

Of course, with any expenses, documentation is extremely important and the more that can be provided to support the expense, the better, said Chambers.

“It plays into both hands — it helps the employer know that the expense is a legitimate expense but it also allows the employee to safeguard that they’re not going to be questioned on that expense, so I think more is always better.”

The majority of Canadian employers use a manual system, said Filipski, who is based in New York. 

“The best-in-class approach we see in the market is a marriage of automation and traditional manual checks and balances. Efficient automation can capture information electronically from travel itineraries, corporate card charges, photo receipt capture and even from airlines, hoteliers and car companies directly.”

This allows the system to “triangulate” trusted transactions and flag others entered without documentation for an additional level of audit, he said.

“Automated systems can also flag common areas of expense fraud such as mileage reimbursement ‘padding.’”

While automated solutions may be more expensive upfront, manual systems are more time-consuming, prone to error and costly over time, said Filipski.

“With manual systems, receipts can go missing or become so worn that they are illegible, expenditures can be misdated or double-claimed and personal items can sometimes be confused with legitimate ones. Transcription errors are easy and serious fraud can be very difficult to track down. Spreadsheet-based systems also do not lend themselves to easy reporting, making data difficult to analyze and management less likely to find specific cost savings from vendors.”

Legal considerations
As for issues around expenses that might lead to dismissals, case law generally deals with the bigger problems, not a few illegitimate meal expenses, for example, said Chambers.

“You can’t necessarily fire somebody for cause for one or two minor expenses that are inappropriate, but in that case… where there were 10s of 1000s of dollars of illegitimate expenses, it’s very clear cut, you can just terminate with cause,” he said.

“If… there’s five or six meal expenses that shouldn’t be in there, that’s going to create a pattern of conduct that’s certainly going to raise some red flags. Whether or not you get to the threshold you have just cause to terminate the person, that’s debatable.”

The courts basically look at the nature of the employment relationship, whether there’s a huge level of trust employed by that relationship, said Chamber.

“The slightest bit of dishonesty will be punished severely whereas if it’s not a huge trust issue, one or two incidences of dishonesty probably aren’t going to be just cause.”

As for an employer being paid back illegitimate expenses claimed by employees, Chambers said he tries to get restitution as much as he can through the civil process as opposed to the criminal one.

“That being said, we’ve had cases of significant misappropriation where we’ve involved the police and then they take over the case and do the investigation and decide whether or not charges are going to be laid. Normally, that leads to restitution, not normally 100 per cent of the dollar but you might get a percentage of your recovery back,” said Chambers.

“It really comes down to the amounts. If it’s a clearcut case of theft, you’re better off to involve police and have it done by way of restitution and if it’s a more murky area, it’s probably best to deal with it as a civil matter.”

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