Fraud schemes involving expense reimbursement committed by an employee are considered one of the many types of fraud that falls into the asset misappropriation category. According to the ACFE’s 2024 Report to the Nations, asset misappropriation is by far the most common category of occupational fraud at 89%, however, it tends to have the lowest losses when compared to other categories of fraud. Specifically, expense reimbursement schemes fall under the category of Fraudulent Disbursements, which is essentially an unauthorized or misleading payment from the organization.
There are several ways that an employee can commit expense reimbursement schemes and are as follows:
Mischaracterized Expenses
Mischaracterized expenses occurs when an employee submits invoices and receipts for reimbursement of personal, extravagant, or otherwise inappropriate expenses. Personal expenses are purchases that are solely for the employee’s benefit and unrelated to any business purpose. Personal expenses can include anything from retail and dining purchases to gas used for personal travel. Extravagant or inappropriate expenses are purchases that are above and beyond what is necessary for a normal course of business. Often times, these purchases are related to travel and entertainment. For example, an employee may make unnecessary upgrades to airfare or hotel rooms, extending travel days beyond what is required for the business purpose (conferences, meetings, etc.), over-the-top dining purchases, such as expensive bottles of wine, or including expenses related to family or friends.
Overstated Expenses
Overstated expenses occurs when an employee submits invoices and receipts for reimbursement for amounts that are greater than what the actual expense was. An employee may manipulate the invoice or receipt to inflate the actual expense amount or exaggerate out of pocket expenses when a receipt is not required.
Fictitious Expenses
Fictitious expenses occurs when an employee submits receipts or invoices for reimbursement for expense that do not exist. An employee may create fake invoices or receipts for approval or submit no receipt at all if there are limited controls and oversight over the expense reimbursement process.
Multiple Reimbursements
Multiple reimbursements occurs when an employee submits the same receipt or invoice several times for reimbursement at different points in time.
In addition to the expense reimbursement schemes discussed above, inappropriate use of a company issued credit card may also be considered another expense-type fraud. Rather than submitting invoices or receipts for reimbursement for expenses paid initially by the employee, the employee with access to a company credit card may make personal, inappropriate, or extravagant purchases beyond the normal course of business that may go undetected or unchecked. Companies may simply pay monthly credit card statements without reviewing the purchases and supporting documentation for appropriateness.
In all types of expenses reimbursement schemes above, the most common reasons employees are able to get away with it is due to lack of effective controls and management oversight. According to the ACFE’s 2024 Report to the Nations, the most common contributor to the frauds reported in their study was a lack of internal controls (32%), followed by an override of existing internal controls (19%) and lack of management review (18%). To minimize fraud, CCH checkpoint recommends the following controls:
- Require that the original receipt be submitted for each item on expense report.
- Establish written policies regarding air travel, hotel, and meal guidelines, and limiting entertainment. Having a robust and clear travel and meal policy leaves little room for interpretation by the employee.
- Require review and approval of expense reports before they are paid. Receipts should be compared to expense submitted and items included should be reviewed for reasonableness.
- Check signers should not approve their own expenses and signed expense checks should be distributed by someone other than the check preparer.
- Compare mileage reimbursements to the previous year requests.
- Specifically for credit cards, reconcile monthly credit card statements to expense reports.
In addition, management should consider including expense submission deadlines, regular review of overall expenses submitted by employee compared to others and to the organization’s expectations, comparison of actual expenses to budgeted, and unusual fluctuations.
Stay Tuned
This is article is a part of our “Leader’s Guide to Fraud Prevention” series, designed to provide ongoing guidance on simple, effective actions leadership can take to prevent fraud, waste, and abuse. Future articles will explore everything from emerging fraud trends to critical risk areas like cybersecurity, as well as entity-wide recommendations for strengthening controls. By making a few strategic improvements to your fraud prevention environment, your organization can build a stronger foundation for long-term financial success.
Missed the first few articles of the series? Check them out here:
- Risk Mitigation Starts with You | The Bonadio Group
- Fraud Facts & Misconceptions | The Bonadio Group
- How to Protect Your Business from Cash Fraud | The Bonadio Group
- Payroll Fraud: Understanding the Schemes Involved | The Bonadio Group
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
