Intentional vs Unintentional Expense Fraud (And Finding the Difference)

Do you cringe just hearing the words “expense fraud”? You’re not alone. 

It’s something that every accountant has to deal with, and it is becoming more and more common every year. In fact, it’s so common that on average it causes businesses billions in loss a year. 

Despite how terrifying that number looks, expense fraud is absolutely preventable. When you consider that one-third of expense fraud occurs due to a lack of internal controls, it’s clear that there are methods available to reduce or eliminate fraud.

But the first step to setting up the right controls and safeguards is understanding how expense fraud takes place. The first is intentional tax fraud, which is the easiest to mitigate. Unintentional tax fraud, however, is trickier. 

Unintentional vs Intentional Expense Fraud

While the difference between unintentional and intentional expense fraud seems obvious, being able to identify the trends between the two types of expense fraud is vital. Knowing these can help an employer figure out if one of their workers has made a genuine mistake or has more sinister intentions. 

Intentional expense fraud is often easier to figure out. Mischaracterized personal expenses on company cards, multiple reimbursements for the same thing, overstated purchases or even fake business expenses with false receipts are all intentional expense fraud. Although it’s possible that someone made a genuine mistake, these common forms of expense fraud can cause significant loss, no matter how “small” the extra charge.

Often these fictitious expenses may seem so insignificant, that they don’t matter. At least, that’s what the employee believes. But expense fraud goes far beyond taking home office supplies for personal use. Asking for reimbursement for extra mileage, room service on a business trip, alcohol at a business meaning, recording higher tips, and other non-covered expenses add up over time. 

What kinds of people commit intentional expense fraud?  Only 5% of employees commit 82% of expense report fraud. It may seem tempting to keep an extra close eye on new hires or younger, struggling employees who seem like they’d have a lot to gain from taking advantage of an employer. However, the truth is that expense fraud is more commonly committed by higher-ups. The more the responsibility, the more likely that they have the ability to freely use things like company credit cards, or sneak in a personal expense or two. 

But what if it really was just a mistake? Even if no harm was meant, unintentional expense fraud can result in a real loss for a company. Human error accounts for a majority of accidental expense fraud, and sometimes even triple-checking things like receipts aren’t enough. Plus, correcting even minor mistakes in reporting can cost the company far too much time and unnecessary stress.

In fact, it’s possible that your employees are not even aware of your company’s expense policy. Without proper training or guidelines, it’s possible that the staff cannot differentiate between legitimate expenses, especially in relation to business travel. 

But that the end of the day, it’s the finance department that has to review and identify the fraudulent expense claims. And if you are using manual processes, it can be almost impossible to tell the difference. 

Intelligent Automation: The Best Tool For Expense Fraud Prevention

While there will always be human error, that doesn’t mean you can’t prevent expense fraud. 

A clear, well-communicated policy that’s made clear at the beginning is the first step. It’s important to make sure that employees are well aware of the policy beyond just the onboarding process. For example, employees who are going to be reimbursed by the company should have someone sit down with them and go through the reporting process. This helps the employer feel at ease that the process is clear, and helps the employee report easier. 

On the tech side of things, AI, specifically intelligent automation, can also help you identify expense reimbursement fraud. A robust expense management software that automates the process can verify transactions in seconds rather than minutes or hours with a high degree of accuracy. In other words, intelligent automation helps a company also save time and is far more accurate than simply relying on manual checks and reports. 

For example, Intelligent automation can help you reduce or prevent expense fraud by systematically analyzing data from images, for example detecting that a scanned copy of a receipt is fake or the original receipt. An automated ERP solution can also provide insight into company credit usage, and alert you in case of abnormalities. 

Whether the fraud is intentional or not, solid automation software can spot any exceptions immediately. And instead of your accounting team spending hours reviewing the books, you only have to worry about special cases.

Once you identify the source of the fraud scheme, you can deal with the individual to review the company policies and ensure compliance. 

Dealing with expense fraud

If you’ve noticed a case of expense fraud, it’s important to figure out if it was intentional versus unintentional. Again, there are some things that cannot be mistaken for human error. For example, submitting a fake receipt or submitting a travel expense with a significantly larger tip than requested are clear signs of intentional fraud. But accidentally adding a few miles or buying a drink at a company lunch may not be as clear-cut. 

Ideally, you’ll want to go through HR to review the expense report findings with the employee. If this was a learned behavior, then this means it’s time to review the onboarding process. 

However, if the employee has been lashing out because they feel the company “owes” them? There is a difference between self-entitlement and a work environment that can potentially encourage resentment. Self-entitlement is easy to deal with, but an office full of workers who don’t feel positive about their environment is much harder. It may be time to reevaluate how effective the work environment truly is for its employees, and make sure that their needs are being met.

While attitude adjustments and company culture will be taken care of by HR, it’s up to your financial department to craft clear and concise expense report policies. At the same time, investing in financial technology will allow your department to focus on more high-level tasks while also reducing the potential for fraud. 

More on intelligent automation

The right automation solution can provide your accounting team with the agility to respond to potential fraud immediately and free up resources for meeting business objectives. To learn more about how Itemize leverages intelligent automation to reduce fraud, streamline expense management, and support AP professionals, book a demo with us today.


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