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.



Calculating and Remitting Employee Deductions in Canada

As an employer, you are responsible for paying your staff properly. Employees should have the correct amount of taxes withheld from their checks. Employers are required to comply with the rules established by the Canada Revenue Agency.

If you are a new employer, follow the steps below when setting up and running payroll in Canada.

Setup Business Number: If you are an employer, you are required to submit taxes withheld from an employee’s check to the Canada Revenue Agency (CRA). This will require you to have a Business Number. This can be done online, over the phone, fax or mail.

If you already have a Business Number and already participate in another CRA programs, you will add “Payroll Deductions” to your existing programs.

Obtain new hire information: When you hire a new employee, they must complete a federal and provincial TD1 form.   This form will determine how much tax an employer should withhold from an employee’s check. In addition, you will also need to verify the employee’s Social Insurance Number (SIN) card. When checking the card, make sure that the name and SIN are the same as what the employee included on their TD1 form.

Calculate deductions: To determine the amount of deductions that should be withheld from an employee’s check, do the following;

Determine taxable wages – In addition to salaries and hourly wages, employees may have other taxable benefits that should be included in their compensation. These may include providing employees with low interest loans or granting the use of a company car.   The CRA’s Guide T4130, Employers’ Guide – Taxable Benefits and Allowances gives details on how to calculate the value of these benefits and which taxable benefits are subject to GST/HST.

Employee’s pay is typically subject to three types of deductions; income taxes, Canadian Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. An employee’s wages, along with their taxable benefits, are subject to deduction.

Deduct income tax: To determine how much income tax you need to withhold, you can use the CRA tool Payroll Deductions Online Calculator, which calculate the income tax withholding, as well as other payroll deductions. You can also use the provincial or territorial tax tables to determine income tax withholding.

Deduct CPP: If an employee is between the ages of 19 and 69 years old, CPP contributions are required. Certain exclusions apply for disability or if the employee is currently receiving pension payments through the CPP. CPP contribution calculations and other information about the program can be found on the Canada Pension Plan page from the CRA.

Deduct EI Premiums: EI premiums are deducted based upon the total wages paid. They are calculated based on a rate of 1.62% of annual insurable earnings, up to $53,100. The maximum EI premium contribution for an employee for 2019 is $860.22. In addition, employers are required to match the contribution at a rate of 1.4% of the premium withheld. Once an employee has reached the maximum threshold, EI deductions and the related employer contribution will cease.   EI premiums can be calculated using the CRA’s Payroll Deductions Online Calculator or by using tables provided in the Guide T4302, Payroll Deductions Tables and Guide T4008, Payroll Deductions Supplementary Tables.

Other deductions: In addition to the CRA-mandated deductions, an employee may have other deductions withheld from their checks with are specific to your company. These can include deductions for life insurance premiums, retirement plans, or extended health benefits.

Remit your deductions and employer contributions: Deductions can either be remitted online, in person, or via the mail.   Employers remit their deductions based on their average monthly withholding amounts (AMWA). New employers, however, are classified as regular remitters. Once an employer has established a remittance history, they will be notified by the CRA of their change in remittance frequency. Details for remittance frequency are included below;

  • Regular Remitter – Must submit deductions by the 15th of the following month after paying employees
  • Quarterly Remitter – If your average monthly withholding amount (AMWA) remittance is between $1,000 and $3,000, you may be eligible to submit deductions quarterly. This should be done by the 15th of the month following the end of the quarter. Quarters are defined as:
    • January – March – remit by April 15
    • April – June – remit by July 15
    • July – September – remit by October 15
    • October – December – remit by January 15
  • Accelerated filer – Threshold 1: For an AMWA of $25,000 – $99,999.99, an employer is required to remit their deductions as follows:
    • Deductions from days 1- 15 in the month should be remitted by the 25th of that month
    • Deductions from days 16 – 31 in the month should be remitted by the 10th of the next month
  • Accelerated filer – Threshold 2: Employers with an AMWA of $100,000 or more must remit their deductions within three days of the last date listed below:
    • Day 1 through Day 7
    • Day 8 through Day 14
    • Day 15 through Day 21
    • Day 22 through the last day of the month

The CRA’s Pay (remit) source deductions will provide more information about remittance requirements, as well as how to correct errors made.

Complete T4 slips and returns: As an employer, you are required to remit annual reporting to the CRA. These reports, called T4 slips, reflect the total amounts of income and source deductions for each employee for the year.   T4 Slips have 3 copies, with one going to the employee, one sent to the CRA, and one held by the employer.  Employers are required to provide employees with a copy of their T4 slips by the last day of February.

The T4 Summary and T4 Slips are required to be completed and sent to the CRA, no later than the last day of February. Forms that are filed beyond this deadline will be subject to penalty. If you have more than 50 T4 slips to file, you must do this electronically using the account that you’ve setup with the CRA.   If you have less than 50 T4 slips, you may remit these to the CRA via mail. As long as it is postmarked by the last day in February, it will not be considered late.