How to detect and prevent expense fraud

Expense fraud refers to the intentional inflation of reimbursements by employees. It happens when employees deliberately submit false expense claims.

If you're a smaller business, expense fraud can be especially damaging to your financial health. In this article, we'll define what expense fraud is, explain the most common types of expense fraud, and share some strategies to prevent it.

What is expense fraud?

Expense fraud is among the most pervasive types of occupational fraud. Also known as expense reimbursement fraud or expense reimbursement schemes, it happens when employees intentionally claim false or inflated business expenses for reimbursement.

There are several ways employees could commit expense fraud, including fabricating expenses, padding or inflating costs, duplicating claims, altering receipts, or submitting personal expenses for reimbursement. In all these cases, employees are purposefully seeking to take advantage of the reimbursement system.

It’s important to note the difference between expense fraud and simple mistakes. For example, employees might make a typo on their claim or misunderstand your company’s expense policy. While both can impact your bottom line, the key difference is intent: expense fraud is a deliberate attempt to gain financially.

How common is expense fraud?

According to the Association of Certified Fraud Examiners' 2024 Report to the Nations, which looked at nearly 2,000 cases worldwide, expense fraud is one of the most pervasive asset misappropriation schemes. Expense reimbursement fraud occurred in 13% of such cases and lasted an average of 18 months before detection, making it one of the most enduring types of fraud.

The median cost of expense reimbursement fraud in the cases examined was $50,000 a year, marking a $10,000 increase since the ACFE’s 2022 report. It’s also one of the most common types of asset misappropriation schemes across industries, from technology and manufacturing to government and social services. As a common and long-lived issue in so many different industries, companies need to understand how expense fraud happens and how to prevent it.

How does expense fraud happen?

Expense fraud is a cultural problem. According to the ACFE's 2024 report, 20% of small businesses (with fewer than 100 employees) and 12% of larger businesses or corporations (with more than 100 employees) experience expense fraud. That means expense report fraud is deeply embedded in business culture. To change that mindset, small business owners need to promote a culture that discourages fraud.

It starts with the little things. For instance, a sales representative asks a merchant to make out a receipt for more than what they paid. This often happens with cash transactions where the merchant is unlikely to report the sale as taxable income. In this scenario, both parties are breaking the law. The behavior is accepted because “everyone is doing it”—but this mindset becomes systemic over time.

The problem can also be internal. Without proper spend management tools and policies, there’s no checks and balances system to stop employees from “beefing up” their expense reports. Chances are, they learned how to do that from a more senior employee who has been doing it for a while. Each seemingly “harmless” act helps the problem grow.

Responsibility for eliminating the problem of expense fraud in the company rests with business owners. The accounting department may be tasked with finding the erroneous entries, but ownership needs to provide the tools to help them do their jobs.

Why do employees commit expense fraud?

In almost all cases, employees commit expense reimbursement fraud for personal financial gain. But it’s natural to wonder why employees would risk their jobs for such a seemingly small reward. The reasons vary, but here are some of the most common ones:

1. Financial pressure: Personal financial trouble or debt can drive employees to commit expense fraud for additional income
2. Rationalization: Some employees may justify fraud by claiming they deserve higher compensation, or that the company “owes them” for their dedication
3. Low risk of being caught: Employees may believe that the risk of getting caught is low, or that their fraudulent reimbursements are so small they’ll go unnoticed
4. Workplace culture: As we mentioned above, if employees see their co-workers get away with claiming false expenses, they’ll be more likely to try it themselves

Increased cost of living and inflation likely contribute to the rate of expense fraud as well, which means it’s more important than ever to take steps to strengthen your internal controls to get a handle on expense fraud.

Common examples of expense fraud

There are several ways that expense fraud occurs, and not all of them are intentional. Here's a look at each type of fraud:

Fraudulent business expenses

This is when employees request payment for business expenses they never incurred. For instance, the employee might provide a receipt for a luxury dinner at a high-end restaurant when they actually dined at a more affordable establishment. They may also submit false receipts for expenses like taxi rides, claiming they used a taxi service when they used public transportation.

Personal expenses

‍Like fraudulent expenses, submitting personal expenses for reimbursement is a fraudulent act, but this can be accidental if the employee is using their personal credit card for business expenses. We’ll cover more on that below.

Multiple reimbursements

‍Submitting an expense more than once is most often an error, not an intentional act. Expense report fraud detection teams always check dates, so this is easily uncovered if you know where to look for it.

Inflated expenses

Another form of expense fraud involves inflating legitimate expenses rather than entirely fabricating them. In this scenario, employees may accurately incur certain business expenses but intentionally inflate the costs or submit an expense claim for amounts that exceed the true amount spent.

Altered receipts

According to the ACFE’s 2024 report, altering physical or digital documents is one of the most common ways employees conceal fraudulent activity. For instance, an employee could manipulate a receipt by adding a few dollars to the total, showing a larger tip than they actually paid their server, or digitally removing alcoholic beverages from a receipt if they’re out of policy.

Maverick spend

A variation on these categories is something called maverick spend. It doesn’t involve false receipts or fake numbers. Rather, the employee spends and submits accurate reimbursement requests—they just don’t follow your company expense policies or spending guidelines.

Zombie spend

Zombie spend happens when money is continuously spent on goods or services that are no longer used, like SaaS subscriptions. This type of spending can also present the problem of shadow IT. This is when employees sign up for unauthorized SaaS programs or download apps outside the company system, potentially exposing the company to malware or viruses.

Many of the examples listed above are oversights rather than intentional fraud. Still, each instance of unauthorized spending, whether intentional or unintentional, erodes your company’s bottom line and contributes to the cultural acceptance of these behaviors among employees.

How to detect and prevent expense fraud

To detect expense fraud with a high degree of accuracy, you'll want to use an expense management system that automates the process.

A manual expense management system requires employees to submit reimbursement reports along with their own credit card receipts. Fake receipts and personal expenses can easily slide through these systems, and multiple or overstated submissions only show up after manual scrutiny.

Detecting zombie spend is even more difficult. Most accounting departments need to do a full financial audit to see it, and it could still get missed because it'll be buried in a mass of legitimate SaaS and other software subscriptions.

Corporate cards with automated expense tracking and reporting make expense fraud detection easy and accurate. At Ramp, we help you monitor spend and flag any potentially unauthorized or fraudulent charges within our dashboard.

You can also prevent expense fraud before it happens by setting up predetermined spending limits and approved vendors or expense categories. That way, employees are empowered to spend on the things they actually need, with no risk of exceeding budgets or engaging in unauthorized or fraudulent transactions.

Prevent expense fraud with Ramp

With Ramp's finance automation, the days of manual expense reports and fake receipts are over. Upload your expense policy and set spend controls that only allow purchases from certain vendors or expense categories.

We also provide an online dashboard where you can track expenses in real time with an API you can use to connect your expense platform to your accounting software. Automatically process, record, verify, categorize, and register expenses on the general ledger—preventing employee expense fraud.

Ready to curb expense fraud? Sign up for Ramp for free.