The Issue

Claiming for travel, entertainment and other expenses is a regular part of many people’s working lives. There is a whole range of expenses that can be legitimately claimed for and most companies will have a documented policy to define what can be claimed and allowable limits for different expense types.

Common types of expense include:

• Travel – air fares, train fares, car mileage, etc.
• Subsistence while travelling on business or working at remote locations – hotels, meals, drink
• Entertainment – events and meals, etc., with colleagues, partners, customers, prospects, etc.
• Equipment / services needed to carry out the job – books, printers, stationery, etc.

For those so inclined, claiming for expenses presents an opportunity to misuse and abuse the system for personal gain. In simple terms it is a relatively easy way to steal money. Motivations range from a simple desire to supplement income through to gaining money or services to use as bribery to secure contracts.

Rogues resort to many kinds of abusive tactics:

• Submit duplicate claim for the same item across different periods
• Submit a regular expense claim for an item purchased and paid for on corporate credit card or
  purchase card (p-card)
• Make multiple claims at level just below threshold where proof of purchase required
  (UK Member of Parliament fraudulently claimed L53,000 including claims kept just under the annual expense allowance. The money was used to fund home improvements.)
• Inflate claimed amount (tips often used to this effect)
• Claim for personal use items (San Francisco Travel manager used the corporate credit card to pay $70,000 of personal expenses, including private school fees.)
• Use false receipts
• Claim for items never purchased
• Claim for subsequently cancelled bookings
• Use expenses to fund bribes and “facilitation payments”

The Impact

The misuse of Travel & Entertainment expenses has multiple impacts – financial, compliance, reputation, culture and morale. Abusers know the system and work it to their advantage:

• From a financial standpoint, estimates indicate that up to 15% of asset misappropriation is due to Expense Fraud, this according to a study by the Association of Certified Fraud Examiners from 2010.
• Rogue claims can reveal non-Compliance and infringement of Anti-Corruption regulations. If T&E claims are used to fund bribes to secure contracts, then the company is exposed to contravention of regulations such as FCPA (Foreign and Corrupt Practices Act) and the UK Bribery Act and therefore at risk of substantial fines.
• Reputation-wise contravention of anti-corruption regulations and resulting publicity can seriously damage an organisation’s reputation and brand and ultimately affects stock price.
• As for culture and morale, widespread and unchecked abuse of expenses can undermine morale and lead to other and more serious fraud issues.

Finding The Rogue

In many cases, expense claims are given a cursory approval check before payment. If there is nothing obviously untoward, then no questions are asked. Those looking to abuse the system will be aware of this and will adopt tactics to avoid attracting attention. To assist the rogues there are even websites that will generate a set of random expense receipts to support false claims (for example see www.expenseasteak.com).

Having a well structured, well documented and controlled expense process and guidelines helps to reduce the risk. Also strong and visible enforcement with appropriate disciplinary measures for offenders sends the right message to employees. However, regardless of how strong the process, there will always be potential for abuse and potential for abusers to fly under the radar.

So how do you find the rogues? Most companies will have a computer system to process expenses. This means all the data submitted related to expenses is captured in a structured electronic form and therefore
has the potential to be automatically analysed.

If we can define a set of conditions to identify potentially inappropriate claims, then we can automate the process of analysing the claims and flagging any exceptions. Using an exception-based approach reduces the manual effort in reviewing expenses and enhances the rigour and completeness of the checks, i.e., rather than checking a sample of expense reports we can include all expense reports over an extended period.

Checking for exceptions

Examples of exception checks include:

• Same item claimed more than once. Identify any newly claimed item where the amount, item type, personnel number, expense date are identical to an item claimed in the current or in prior periods. Although it is possible to have 2 identical items on the same date, it is unusual.
• Item claimed through regular expenses when purchased and paid for on corporate credit card. Identify expense items where within a given period (e.g., 30 days), personnel number, expense amount are identical to an item on the credit card transaction history.
• Suspicious expense claims. Identify any expense claims where the expense description contains a sensitive / disallowed item or the amount claimed is excessive for the item. For example – Item description contains: Gift, Entertainment, Misc, Sundries.
• Expense items with missing receipts. Identify where a trend of missing receipts is occurring. For example: %age of missing receipts is greater than 20%; Value of missing receipt items over a defined threshold.
• Vendor records set up with employee details to enable payments through regular Purchase Order / Invoice process.

Summary

Abuse of Travel & Entertainment expenses has multiple impacts – financial, compliance, reputation, culture and morale. Abusers know the system and work it to their advantage.

Intelligent use of exception analytics identifies specific instances of abuse and trends over time. Such abuse is difficult and time consuming to monitor manually. Use of exception analytics complements a well defined
T&E policy and helps to enable enforcement.

The very existence of and communication of the use of advanced data analytics to monitor expense claims has a salutary effect and in itself will reduce inappropriate claims. Indeed from an FCPA perspective, the US Department of Justice has already made it clear it will reward proactive, best practice compliance monitoring even if something goes wrong. In these situations action will be more lenient.