How to identify and prevent fake reimbursement claims
While analyzing business risks, many companies fail to consider the fraud that internal members of the company can create. Sometimes, internal fraud can be more damaging than any external risk.
Expense reimbursement fraud occurs when your business has loose expense policies and employees feel entitled to take advantage of the system's loophole. Making fake expense claims is the most common type of business expense fraud.
Let’s keep reading to learn more about fake reimbursement claims, their types, and how to manage them.
Fake reimbursement claims are those that did not actually occur. Meaning the employees submit expense claims that were not incurred. Employees are generally entitled to reimbursement for certain types of expenses.
Hence, while submitting a claim for their out-of-pocket purchases for business purposes, they might slip in some expenses that were not paid for.
For example, if an employee has to be reimbursed for the expenses they made on a business trip, like hotel reservations, air tickets, etc. While submitting the claim, they might put in expenses of small amounts that were not paid for, like a taxi payment that they did not take or tips to the hotel staff that was not given.
Expense fraud is widespread. You might not realize it, but 37% of frauds committed are by employees of the company or internal agents. For a company with more than 100 employees, the cost of business expense fraud is almost $30,000 every year.
On a large scale, expense reimbursement fraud costs almost $1.5 million in losses. The devastating fact is that out of all the employees who commit expense fraud, only 17% are caught.
Besides being expensive, expense report fraud slows down the whole system of reimbursement and seriously hampers the legitimacy of the process. Employees have to spend 2x more time detecting fraudulent expenses. If done manually, you will need to have a big team of accountants and financial professionals to deal with business expense fraud in your company.
As the name describes, these are fake expenses. Employees can easily fabricate receipts of expenses that were not incurred. Plus, it’s not that difficult. A lot of design apps and third-party software allow the creation of fake receipts.
So, it becomes almost impossible to flag any fake expense because there is actual proof of the expense, even when no such expense exists. For example, fake restaurant bills from a business trip, fake taxi bills, etc.
Next comes multiple reimbursements. This means claiming the expense more than once. An employee may submit the same receipt multiple times to get reimbursed for the same thing multiple times.
This means that in manual reimbursement processing, your finance team might not be able to catch these duplicate expense claims. For example, an employee might submit their travel per diem allowance more than once to get extra money in the name reimbursement.
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Another type of expense fraud is personal expenses. Sometimes employees slip in receipts and documents of personal expenses along with some business expenses they are supposed to be reimbursed for. Like a personal restaurant bill along with other company-related expenses.
Catching these fraud expenses can be almost impossible if not carefully processed. Also, since expenses cannot be categorized just with a receipt, detecting these fraudulent receipts becomes even more difficult.
If you do not have clear expense policy guidelines, employees can easily make extra spending and ask for reimbursements for them. For example, suppose your company does not reimburse tips given to chauffeurs or waiters, but it isn’t mentioned in the policy guidelines.
In that case, the employees can easily submit claims for these expenses. You will have to compensate your employees because there is no definite rule for these expenses.
You might think, how difficult can it be to detect a fraudulent expense claim? Just ensure that the employees submit the claims with receipts and on time. The finance team members will just have to check all claims with receipts and be done.
However, how effective do you think this is? It’s not rocket science to create fake receipts, overstate the bill amount, or slip in some fake expenses. Manual expense reimbursement fraud detection will only work if an exhaustive examination of each expense claim is conducted.
But as a wise business owner, there is no way you will want to spend money and time on this. Though automation is your best bet to eliminate expense reimbursement fraud, here are some ways to identify expense report fraud.
Most of the time, if you carefully analyze the time and date of a fraudulent transaction, it can be flagged. For example, there might be receipts from those dates when the employee was on vacation or weekend taxi bills or payments made to non-business-related vendors.
Every vendor is supposed to release certain information on their invoices, and these mandatory information details might vary from country to country. Hence, an automation system will help you check all expense receipts and claims for completing all compulsory fields like tax registration numbers or a barcode.
If any of the receipts lacks the basics, they will be automatically flagged and stopped from being further processed by the system.
Use travel and expense analytics to identify the spending behavior of your employees. You can determine the problematic areas by focusing on the odd parts in the analytics.
For example, if there is an average spending amount that your employees generally have on a business trip, but one of the employees has a spending way higher than the other, this is something to be suspicious about.
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Maintaining a travel and expense policy is the first and most obvious step to prevent business expense fraud. Lay down the ground rules for employee expenses. Clearly mention which expenses will be reimbursed and which will not. Your company might choose not to compensate for the alcohol, tips, meals, etc.
Plus, you can abide by the IRS standard mileage rate for mileage reimbursement.
While framing the expense policies and educating your employees about the right way to file expense claims, highlight the requirement for original receipts. Always demand original receipts from your employees and make it clear that only original receipts will be eligible for reimbursement.
Plus, the expense management automation system can detect whether receipts are legit.
If you make a smart decision and get expense management software, ensure to set a multi-layer approval structure. This means that you can have different levels of approvers.
For example, you can have department managers as Level 1 approvers, a finance team member as a Level 2 approver, and the head of finance or operations as the Level 3 approver. Some automation systems allow setting 4-5 levels of approvers.
One of the best ways to prevent expense reimbursement fraud is to implement the use of corporate cards. Corporate cards are connected to business accounts and installed with various features that can easily help detect and prevent expense report fraud.
Corporate cards allow you to set spending limits, give real-time expense tracking and recording facility, direct integration with the accounting system, and much more. You can give these cards to your employees, and no expense will go unnoticed.
Another effective technique to avoid business expense fraud is conducting regular expense audits. When you conduct regular audits, you can easily help detect unusual spending behavior, any anomaly in the regular spending habits of the employees, or any unauthorized payments made to non-approved vendors.
If you find employees committing expense fraud, you need to have systems in place to take care of it. Company rulebooks should highlight the prosecution procedures for employees committing fraud, the means to set up a panel to make a decision, as well as parameters to decide what level of fraud receives what kind of consequence.
Let us make you an offer to help you prevent expense reimbursement fraud in the easiest way possible.
Volopay is an all-in-one corporate expense management software that is designed to take over all tedious spend management processes, automate them and ultimately save the business time and money.
Automatic receipt character recognition, real-time expense tracking and recording, automatic receipt forwarding, bulk import, direct accounting automation, intrinsically connected corporate cards, both virtual and physical, multi-level approval system, spend control tools, and much more.