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Expense fraud: All you need to know

09/05/2023 minute read Nadine Sutton

Expense fraud costs companies millions of pounds each year, putting a significant strain on their operations. This is an ongoing issue for finance teams, as they’re the ones tasked with finding effective ways to cut costs (which is even more pressing during a cost-of-doing-business crisis).

To tackle this problem, it’s important to understand what expense fraud is, the wider impact it can have, and how to detect it. In this blog, we’ll discuss the different types of expense fraud, how to safeguard against it, and what the future of the expense management process might look like.   

What is expense fraud?

Expense fraud is essentially the act of misrepresenting information to gain an unwarranted financial benefit. There will be a system in place within the finance team to ensure employees are reimbursed when they have incurred a cost on behalf of the company. But some people will look to take advantage of this process to receive more money than they’re owed.  

While some instances of expense fraud will be planned, there will be other times when a genuine mistake has been made. Even so, unintentional fraud can still cost the business in ways it might not be able to afford. Organisations can lose a significant portion of their revenue due to these transgressions, and fraudulence has been on the rise with economic conditions putting pressure on people to make ends meet.  

It can take many forms, ranging from duplicate claims to purchases that fall outside the company expense policy. Regardless of how it happens, if this behaviour is left unchecked, it can have repercussions that go beyond finances. For example, it can create a lack of trust and feelings of uneasiness within the workplace culture.

Different types of expense fraud

To effectively prevent expense fraud, it’s essential to understand the different types that exist. The most common are:

Ghost employees

This is when a non-existing employee is added to the payroll, or when an existing employee is kept on the system after they’ve left the company. The perpetrator will then use this ghost employee to submit false expense claims, so they can receive the associated benefits. This false claim will have no legitimacy, but it will be difficult to detect (as everything will look normal on the surface).

Exaggerated expenses

There may be occasions when an employee exaggerates the cost of expenses such as food, transport, and accommodation. While these may be legitimate claims, they will inflate the true cost of these expenditures to receive a larger sum. Those in the finance team should look out for frequent claims that seem out of proportion.  

Personal incursions

This is when someone submits an expense claim for purchases that are not related to corporate spend. This can include things like personal shopping, personal holidays, car hire, or other luxuries. They will ultimately be diverting company money for their own use rather than for business use. It should be fairly easy for those managing expenses to spot claims that are out of the ordinary.  

Duplicate claims

This is perhaps the most common type of expense fraud. It’s when a member of staff submits the same expense two or more times, so they can multiply their returns. It can seem low risk to the perpetrator, as they can always pretend it was an accident if they are caught. It’s also very possible for finance employees to miss duplicates, particularly if approvals are granted manually.  

Unauthorised spend

This is when an employee makes a purchase that doesn’t fall within the company expense policy, but they still claim for it anyway. In this scenario, they are essentially using business finances without the proper authorisation. Organisations can sometimes fall victim to maverick spend too, with individuals purchasing expensive resources that haven’t been approved by those higher up.  

How to identify expense fraud

Those being fraudulent will of course do their best to conceal what they’ve done. But there are some unmistakeable red flags finance teams can look out for:

Inconsistent receipts

If receipts don’t match up with the claim being put through (i.e., the amount being claimed is much higher than the total on the receipt), this is the clearest sign something is afoot.

Suspicious behaviour

It’s key to identify patterns of behaviour when looking for fraud. There may be an individual whose claims are consistently much higher than the rest of the workforce. Or perhaps their claims are constantly over the allocated limit. In these circumstances, it’s wise to investigate further.

Unusual submissions

It’s not just patterns that can serve as an identifier, there may be standout anomalies too. For example, a claim could be unusually high, take place at an odd time, have an ambiguous description, or be submitted by a non-regular claimant. If anything appears to be out of the norm, this may be a warning sign.

Top 5 tips for tackling expense fraud

Expense fraud prevention is an essential component of risk management. And there are specific actions/behaviours finance teams can incorporate to protect against this threat.

It might sound obvious, but my number one tip for tackling expense fraud is attention to detail. It’s all too easy to put a claim through without looking at the intricate details. But it’s often these intricacies that will uncover fraudulence. For example, noticing claims for meals when the receipt is clearly dated on a Friday night, or even on a Saturday or Sunday. Obviously, we cannot do this manually for every receipt, but just by having a keen eye we can prevent fraudsters from slipping through the net.” Nick Spooner (Accounts Payable & Expenses Team Lead, Advanced)   

Here are our other top tips for tackling expense fraud:

1. Establish a clear expense policy

As with any business process, it’s essential to have some kind of structure/policy in place that is easily interpreted and adhered to. When the expense policy is as detailed as possible, it serves as a foundation, eradicates ambiguities, explains how to log an expense, and highlights what should be approved/declined. Those involved with the process should have clearly defined roles, and any changes should be immediately communicated to all employees.  

2. Put appropriate controls in place

By putting effective controls in place, it becomes easier to limit occurrences of expense fraud. For example, only authorised personnel should be allowed to spend money or access financial resources. And there should be a clear audit trail for all transactions that take place. Additionally, there could be layers of access in terms of who can see expense data, as well as a double-signature requirement for approvals.

3. Monitor activity thoroughly

Strong financial monitoring is a must when attempting to spot spending irregularities. Finance teams should produce regular expense reports if they are to achieve transparency, consistency, and compliance. Rigorous analysis of these reports will make it possible to identify patterns and abnormalities. The fraud prevention strategies being utilised should be constantly updated and improved too. And digitising your finances is a further way to enhance visibility.  

4. Leverage technology to enhance process

Automating the expense management process through technology makes it much easier to keep track of fraud. Software can be fed your unique company policy, so that it can then cross-reference this with claims, and accept/reject them accordingly. Automation ultimately reduces human error and increases the speed of reimbursements. With AI becoming more powerful too, it will be possible to detect patterns at an increasingly early stage, so the associated damage can be minimised.  

5. Train employees on fraud prevention

Once all the policies and tools are in place, the final piece of the jigsaw is to ensure those in the finance team know how to use them. Part of their initial training should involve fraud prevention best practices (such as what red flags to look out for). They must know how controls are enforced, how to report suspicious activity, and what resources are available to them. They should be given appropriate learning opportunities with any technology being utilised too. And vigilance/proactiveness around fraud should be instilled as part of the employee culture.   

What is the future of expense fraud?

As technology advances, so does the sophistication of expense fraud (making it ever more difficult to conquer). The financial losses associated with this issue have been on the rise in recent times, making it impossible for CFOs to ignore smart/innovative solutions.

AI and automation tools have given finance leaders an edge in this battle. Expenses can now be tracked from a range of devices, ensuring irregular claims can be identified more seamlessly. On top of this, peer-to-peer validation has made it possible for employees to verify each other's expenses, so that the associated reports are far more credible.

Going forward, a proactive approach towards expense fraud will be crucial if businesses are to ensure their operations are financially secure (which will be especially important when they’re navigating future economic downturns).

Evaluating current trends is a proven way for CFOs to stay ahead of both threats and competitors. One such trend is using Cloud technology to improve compliance. This is essential in a climate of everchanging regulations.

The most effective future-proofing strategy for businesses will be implementing technology that can display real time expenses data. Having access to accurate data ensures powerful insights can be gained during analysis, which, in turn, drives improved decision-making and overall performance.   

What next?

Learn more about the expense management process, as Andrew Pearson (Product Manager) discusses what it is, why it’s so important, and how to build one that works for you. Andrew also highlights the repercussions of poor expense management, as well as the benefits gained from automating the process.

Looking for an expense management solution that integrates seamlessly with your financial management system? Advanced provide a powerful Cloud-based accounting solution that helps finance teams to boost their productivity and efficiency. Get in touch to see how we can streamline your processes.