5 Things You Need to Know About Expense Fraud

Expense fraud can often be difficult to diagnose, but it is often one of the most underrated forms of fraud. According to the Global Payroll Association, 10% of employees claim they often submit erroneous reports, while a whopping 20% do so irregularly. And if your financial team is manually cataloging these expenses, it’s easy to miss where those dollars are going missing.  

Unlike other forms of fraud, expense fraud is rarely malicious. In fact, even your most upstanding employees can end up misusing company funds. But it’s not just average employees who are often guilty of fraud. Workers in accounting and finance may also deliberately or accidentally commit expense fraud. 

Why Does Expense Fraud Happen?

There are several reasons why expense fraud might happen. Employees might not know what counts as a legitimate business expense. They may also believe that an extra dollar here or there won’t matter much to the company, especially if there is an allotted budget. Many times money might be lost due to human error.

That said, there have been cases of malicious expense fraud. For example, between 2002 and 2009, President and CEO of PACE Worldwide, Paul Dunham along with his wife and Director of Sales, Sandra, stole $1 million from the firm. How? They misused corporate credit cards and submitted falsified reimbursement requests

If you want to stay on top of expense fraud, these are the top five things you need to know:

There Are Four Types of Expense Fraud

Are you familiar with the different forms of expense fraud? There are actually four main ways that employees intentionally or unintentionally siphon money:

  • Mischaracterized expenses – As one of the most common methods of expense fraud, workers will simply consider personal expenses as business expenses. Since you can’t categorize a claim through a receipt alone, this is fairly easy to get away with.
  • Fictitious expenses – Employees may also create fake receipts, and this is easier than ever to do. Apps, design programs, and other third parties can cook up fake receipts and expense claims. 
  • Overstated expenses – Here, the employee states that they spend more than they actually did. There are various ways to do this, including claiming a larger tip or adding a few miles for travel expenses.
  • Multiple Reimbursements – Sometimes, employees may attempt to use a single receipt more than once to claim reimbursement. Finance teams may then accept duplicate payments. 

Employees in accounting and finance may also find other ways of fudging or manipulating documentation. Conversely, they may approve the finances of other employees, knowing them to be fake. 

At the same time, accounting and finance employees working with manual processes are more likely to be overwhelmed by documentation. In these cases, they may not even recognize fraudulent invoices or reimbursements, or they may count certain items twice by mistake.   

Expense Fraud Is Common

Expense fraud is so common, that it accounts for 14.5% of all fraud that we know about. If that number doesn’t sound high, consider that in another study, 85% of respondents admitted to lying on expense reports! 

Employees and employers alike may think that a dollar here and there doesn’t matter. But in the US alone, businesses suffer a loss of $2.8 billion per year due to expense fraud.

So is expense fraud happening in your workplace? Based on the numbers, yes.

Expense Fraud Can Cost You Thousands

On average, employees who commit expense fraud end up requesting nearly $2,500 in false expenses. Some individuals even claim up to $25,000 in expenses! Even one fraudulent spender can cost a company thousands of dollars.

When fraud is committed by a financing or accounting employee, or upper management this amount can increase. These cases of fraud are significantly higher risk, and can result in millions of dollars being lost. 

Human Error Increases the Likelihood of Fraud

When it takes an individual nearly twenty minutes to file a single expense report, it’s no wonder that one in five reports contains errors. Correcting a file takes about another twenty minutes. This means that human error is costing you both time and money. 

Manual data entry and other similar processes don’t just result in expense fraud, but the paperwork buries the accounting and finance team in the documentation. Manually checking receipts, invoices, POs, etc, is a labor-intensive endeavor. So it stands to reason that a lack of visibility, especially in manual and document-heavy processes, only increases the likelihood of human error and direct expense fraud. 

Finally, who are the culprits behind the majority of expense fraud cases? According to one study, senior-level and upper-management workers account for 24% of fraudulent reimbursement cases. Another study further defines the typical perpetrator: Male in a mid-level position, under the age of 44, with a tendency to manipulate a paper-based or manual system

However, it’s important to remember that anyone in the company has the opportunity to attempt expense fraud – even unknowingly. In the UK, two-thirds of employees don’t know their company’s policies on expenses. Meaning even honest workers could make a costly mistake. 

Reducing Fraud

Expense fraud is a slow, but dangerous, leak for most businesses. Lost capital means less revenue to use towards growth. The best way to reduce fraud is to streamline expenses and automate as much as possible. Every study has shown that manual expense report processes are far more likely to be taken advantage of – in part because it’s easy to manipulate and go undiscovered.  

Contact us today to learn more about how Itemize can help you prevent expense fraud and transform your financial data operations. 

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