Eight Ways to Prevent Expense Account Fraud

CPAs & Advisors

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Your employees may be cheating your company by turning in bogus expense reports. While each of these transactions may be small, they can add up to a bundle. Not only does expense account abuse erode profits, it creates an environment in which employees think they can get away with stealing — and perhaps move on to more lucrative fraudulent schemes.

In addition, poor expense account reporting can jeopardize your company’s tax deductions for employee reimbursements if you ever get audited by the IRS.

For all these reasons, your company should have strict expense account policies. Here are eight specific suggestions:

1. Create a written document that explains your company’s policy on how expense reports will be handled. Make sure to stick to the policy with all employees.

2. Require employees to read and sign the document. Then, keep a copy in each employee’s personnel file.

3. Insist on original copies of expense documentation such as hotel bills and credit card receipts. These days, some dishonest employees create bogus documents and then copy them to create a paper trail that appears to be legitimate. Plus, accepting photocopies can lead to multiple reimbursements. For example, an employee copies a hotel bill and submits it for payment this month. He then submits the photocopy on next month’s expense report.

4. Your expense report policy should include a deadline for turning in expenses — for example, no later than 30 days after the expenses are incurred. This prevents employees from turning in claims for old “forgotten or misplaced” expenses when they run into personal cash crunches.

5. For client meal and entertainment expenses, the expense report should always list the following:

  • The name and position of the person who was entertained or fed, along with the business relationship to your company.
  • The business reason for the expense.
  • The date, time, and place where the expense was incurred.
  • The amount of each specific expense item (with no aggregation).

These details are necessary to comply with IRS regulations, but requiring them makes employees think twice about fabricating facts. For example, taking a friend out to dinner and claiming it as a business expense.

Another tax requirement: The IRS also requires that receipts be collected for all entertainment expenses of $75 or more.

6. To ensure uniform adherence to your company’s expense report policy, designate one person (if possible) to review and approve all reports. Your company will benefit as this person gains expertise in administering the policy.

7. Make sure employees’ travel logs match items on their expense reports. Watch for trends, such as taxi receipts that seem out of line. Employees sometimes ask cab drivers for blank receipts that they fill in themselves with higher amounts than they actually paid. Or, two employees traveling together share a cab, but both submit receipts.

8. Have a high-level company executive sign off on all expense report claims before cutting the reimbursement checks. Make sure your employees know this is part of the process. They will be more reluctant to turn in bogus reports when they know someone in a power position sees all the paperwork.

These are just a few ideas on preventing employee expense report fraud. There is probably no way to completely eliminate expense account fraud. However, with effective company policies, you can minimize it.

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