Defending Your Company against Expense Reimbursement Fraud

The last line of defense your company has against expense reimbursement fraud may come from your bookkeeping department. While supervisors and managers often review expense reimbursements, the bookkeeping department can provide a different point of view. By reviewing supporting documentation for sufficiency and reasonableness, a bookkeeping department may also be able to spot potential expense reimbursement fraud just by the nature of the expense.

Common Forms of Expense Reimbursements

Expense reimbursements typically happen in one of two ways;

Use of Corporate Funds: Either an employee has a corporate credit card or has been given petty cash to make purchases. Employees would be required to submit documentation for all credit card purchases or petty cash expenditures.

Use of Personal Funds: In some cases, employers may encourage the use of personal credit cards to pay for business expenses incurred by the employees. This may be done as a means to encourage receipts and reimbursement requests to be turned in timely. Since an employee may lose out if documentation is not submitted, they may be more willing to submit such documents as they run the risk of not being reimbursed.

What is Expense Reimbursement Fraud?

Anytime that an employee submits a request for reimbursement of an expense that is not business related, this is a form of fraud. This can happen either using company funds, such as corporate credit cards or through the use of an employee’s personal funds. In addition, altered or fake receipts, as well as submitting duplicate requests, constitutes fraud.

What can a business do to protect itself?

While nothing is foolproof, a business can start first with defining and communicating its expense reimbursement policy to its employees.

Formalize a written expense reimbursement policy: Whether this is included within an employee handbook or a separate policy statement, clearly document what your expense reimbursement policy is. Within a typical expense reimbursement policy, employers often include;

  • What types of expenses are considered business and subject to reimbursement?
  • Is there an approval process required prior to an employee incurring the expense?
  • What type of documentation is required to be maintained in order to be reimbursed? Meal and entertainment expenses, for example, should include documentation as to who attended the meal, the purpose of the meeting, and what was discussed. Without such documentation proving the nature and intent of the meal, an employer may not be able to deduct the expense on their tax return.
  • If your company requires frequent travel, consider specifically addressing travel related expenses within your policy. This could include preferred vendors to use, such as hotels or rental cars, or limitations on amounts nightly amounts for hotels.
  • Consider a timeframe. Requiring expense reimbursements and documentation to be submitted within a certain time period of the expenditure helps to keep your books and records current. It can also serve as a reminder that failure to submit receipts timely may result in the loss of a corporate credit card use.

Another helpful step would be to include verbiage on the policy stating that the employee has read the policy and agrees to abide by its contents. Their signature will serve as an acknowledgment.

Document your process: Do employees need to fill out a form or submit requests electronically? Is documentation required for every expense or just those over a certain dollar amount? Is written approval required?

In some cases, employers may implement a system that allows an employee to submit requests and receive approvals electronically. If that is the case, does this system allow for sufficient documentation and review? While electronic systems can help monitor expense reimbursements, consideration should be given as to the quality of the documentation. Photocopied and scanned receipts can be easily manipulated. Numbers can easily be changed, which may be hard to detect on photocopies or scans. Requiring original receipts, however, helps to remove the risk of manipulation.   Original receipts also remove the ability to submit duplicate requests.

Even with a formal written policy in place, fraud can still occur within expense reimbursements. Employers can implement the following practices to help mitigate potential fraud;

Review corporate credit card policies and usage – For employees that have corporate credit cards, periodically review their level of activity each year. Consider the purpose of the card with the credit limit established. Lower credit limits on each card can help to control the volume of purchases made.

Establish guidelines as to what positions require a corporate credit card and for what purposes. Employees that change to a role that no longer requires the use of a credit card should turn these in. By establishing the typical expenses that each position would typically use a credit card for can help when monitoring the statement. For example, a salesperson may use their card for travel-related expenses. Charges that appear to be for tools or equipment would be unexpected for that role and should be investigated.

Bookkeeping and accounting departments can be especially helpful at this level of review if they have established guidelines as to what credit cards are typically used for.

Require two levels of review – While this may be challenging in smaller businesses, using two different levels of review can help to detect and deter expense reimbursement fraud. Many times, the employee’s direct supervisor serves as the first level of review. The second level may come from the bookkeeping department or even the owner of the company.

Spot check purchases – From time to time, the level of review should extend beyond just looking at paperwork. Ask to see the physical piece of equipment, tool, or supplies that were bought. Ensure that what was purchased is actually being used in the business. As an extra control, select a few items from older credit card statements to inspect to see if they are still being used.

Management’s Tone – One of the most important controls that a business can put in place is how management reacts to and enforces policies. Corporate environments that promote honesty can go a long way to helping to prevent expense reimbursement fraud.   Although this may be uncomfortable for some business owners, holding employees accountable for fraud is a must. This may mean termination or legal action. How employees view management’s reactions to expense reimbursement fraud can act as a deterrent in itself.

While policies and procedures can help to deter fraud, they are not fool-proof. Management’s active involvement in the reimbursement process is necessary to help communicate the importance of timely submissions as well as the requirement that only expenses incurred for business purposes may be incurred.

Since 1990, Valley Business Centre has delivered expert bookkeeping and payroll services to small and medium-sized businesses. We work with clients located in Whistler, Squamish, the Sea to the Sky corridor, BC, and beyond. Whether you need help with maintaining your books or running payroll, contact the bookkeeping specialists at Valley Business Centre today.



Top 10 Bookkeeping Tips

Top Ten Bookkeeping Tips

Managing your company’s finances can be challenging. Whether you are an entrepreneur just starting out or a seasoned business professional looking for ways to improve your business processes, here are ten bookkeeping tips to help you.


Leave personal expenses out of your business

Sometimes owners don’t know where their business ends and personal life begins. Given the number of hats that they typically wear, it’s hard not blend work with home-life. But when it comes to the income and expense in your company, keeping them separate is key. If you are a newly-formed business, establish a company bank account and corporate credit card as soon as possible for you to make deposits and pay bills that are associated with your company. Keeping personal expenses out of your business will not only make your recordkeeping easier, it can also prevent problems with taxing authorities.


Hold onto your petty cash receipts

Be sure to monitor your petty cash and obtain receipts when cash is spent. Even though petty cash is a small balance, they are susceptible to theft since they are cash. Be sure to account for each transaction with documentation and reconcile your petty cash at least once a month. If petty cash transactions occur frequently in your business, reconciliation may need to be done weekly, even daily. This will help you to catch mistakes and may deter theft.


Make it a habit to pay bills by check or credit card

Avoid the urge to pay bills in cash. In addition to receipts and invoices, paying bills by check or credit card gives you a second form of documentation and helps you to track where your funds are going.   By paying bills in cash, you run the risk of expenses not being recorded in your accounting records, which can cost you money as it may be a missed deduction.


Simplify your chart of accounts

Your chart of accounts is used to categorize your company’s financial transactions. It is a means to group similar transactions together. An effective chart of accounts can help you to quickly pick out unusual or large changes in accounts that you may not have expected.

Most bookkeeping software includes a set of predetermined accounts. Consider using these as a base and adding only those that you need. Consider keeping your list simple, which allows you to quickly see the financial health of your company. A few best practices include;

  • Adding too many accounts can complicate your recordkeeping and make your reporting less effective. Be sure to add only the accounts that you need and have value.
  • Resist the urge to set an account up for each vendor. Rather, consider setting up by function.
  • Check your account classifications. When setting up a new account in your chart of accounts, be sure to pick the right classification, which is either as an asset, liability, equity, income, and expense. Errors in account classification can impact your bottom line if you have expense accounts showing up in the wrong place on your books and records.


Automate your recordkeeping

Using bookkeeping software, such as Quickbooks, Xero, and Peachtree, can help you easily keep track of your income and expenses. By entering transactions and paying bills through a software program, it will automatically record this activity into your accounting records. This eliminates the need to keep manual records or spreadsheets, both of which take your time and may be prone to errors.


Review and reconcile

On a monthly basis, take the time to review your financial position.   Make sure your bank and credit card accounts are reconciled. If you invoice customers, review your accounts receivable by looking for discrepancies, unposted credits, and finally what’s still due to you. Go through your expenses – perhaps there are ways you can easily cut back and save a little money.


It’s all about the documentation – organized documentation

Every payment that is made should be supported by documentation, such as an invoice or receipt. When paying bills by check, it is recommended that you attach part of the check remittance advice or a copy of the check to the invoice. You should also mark the invoice “paid” in order to show that it is no longer due.   This can help to avoid duplicate payments.

Paid and open invoices are often filed alphabetically, making them easier to find   should you need to refer back to an invoice or a receipt. Proper documentation also supports the deductions that you might take on your tax return.   If you are tech-savvy, you can also invest in a scanner and digitize your invoices and receipts. Just be sure that they are organized in a way that you can find them easily.


Use time tracking software to monitor and record your employees’ hours.

If you have employees, consider use time-tracking software. Many programs on the market are cloud-based, allowing your employees to clock in and out using a smart phone or computer. Time tracking software automates a portion of your payroll process and can help eliminate clerical hours. It can also save you money as clocking in and out can give a more accurate picture of the hours worked, as opposed to a manual card. Some software packages integrate with bookkeeping software, making your payroll process even more efficient.


Monitor your accounts receivable

Staying on top of your accounts receivable will help the cash flow of your business. Customer who pay late can drag a business down, making it difficult to pay bills.   By monitoring your accounts receivable, you can address slow-paying customers before they become collection problems. In some cases, you may need to work out a payment arrangement.


If you need professional bookkeeping help – get it

For some people, bookkeeping is just not something that they want to do. Rather than procrastinate, consider using an outside bookkeeping firm. Keeping your records up-to-date is essential to running your business. Using an outside firm that specializes in bookkeeping will free up time for you, but will also ensure that your records are up-to-date.

If you’d prefer to handle the bookkeeping in-house, consider using an accounting software package. Engage the help of a bookkeeper or accountant to assist you with both the setup and training. Knowing how to use your accounting software properly will help you to record your invoices and deposit, pay bills, and classify your expenses correctly.

Running a business is an exciting, but demanding opportunity. As an owner, you are responsible for ensuring that your financial records are complete and accurate. If you need help keeping your records up-to-date, the specialists at Valley Business Centre offer quality bookkeeping and payroll services.