Fraud is an ominous word that brings up images of courtrooms and corporate conspiracies. That’s not the case with expense fraud. It is a crime, but detection usually leads to employee termination and withholding of salary and benefits, depending on the amount of money involved. The fact is that expense fraud is present in most companies, at least in some degree.
This type of fraud is not always intentional. Consider zombie spend as an example. It’s a term that’s used to describe those SaaS subscriptions that your company continues to pay long after they’re needed. Someone initiated those subscriptions and then failed to cancel them. Technically, that’s fraud. Realistically, it’s a bookkeeping error.
In this article, we'll explain some of the common forms of expense fraud along with methods for preventing it.
Common examples of expense fraud
The Oxford dictionary defines fraud as “wrongful or criminal deception intended to result in financial or personal gain.” Merriam-Webster uses descriptors like “deceit” and “trickery.” Keep these definitions in mind when assessing whether an employee has committed expense fraud. There needs to be intent to defraud. Most fraudulent acts fall into four categories:
Expense fraud becomes expense report fraud when fake paperwork is submitted for reimbursement. The intent of requesting payment for fake expenses is clearly fraudulent. There is no “doing this by mistake.”
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.
Submitting an expense more than once is most often an error, not a fraudulent act. Expense report fraud detection teams always check dates, so this is easily uncovered if you know where to look for it.
Receipt matching on expense reports can eliminate an employee’s ability to overstate their expenses. This is a category that can go either way. It could be fraudulent, or it could be due to poor record keeping.
A variation on these categories is a behavior called “maverick spend.” It doesn’t involve false receipts or fake numbers. The employee spends and submits accurate reimbursement requests. They just don’t follow expense policies or spending guidelines. This is a form of expense fraud that we’ll cover in more detail in our expense fraud detection section below.
Certain unintentional acts of expense fraud can cause serious financial and data problems for a small business. Zombie spend, which we mentioned briefly above, has a dark side known as shadow IT. This is when employees sign up for unauthorized SaaS programs or download apps outside the company system. This has the unintentional consequence of, potentially, letting malware or viruses in.
Many of the examples listed above are viewed inside small businesses as oversights. Don’t make that mistake. Each instance of expense fraud, whether intentional or unintentional, erodes the bottom line of a company and contributes to cultural acceptance of the behaviors among employees.
How does expense fraud happen?
Expense fraud is a cultural problem. According to a 2018 report issued by the ACFE (Association of Certified Fraud Examiners), expense fraud is present in 21% of small businesses and 11% of enterprise-level corporations. That means that expense fraud is deeply embedded in business culture. To change that mindset, small business owners need to change their culture.
It starts with the little things. A sales rep 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 could 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 the business owner. The accounting department may be tasked with finding the erroneous entries, but ownership needs to provide the tools to help them do their jobs. We’re not talking about just fraud detection here. Prevention needs to be a priority also.
How to detect expense report fraud
Expense report fraud detection seems simple on paper. Match the receipts with the expenses filed, check the dates, and make sure the employee is following company spending guidelines and policies. The process is clearly outlined. What’s missing with many small businesses is the technology to automate it and eliminate any margin for error.
The magnitude of doing fraud detection without automation is overwhelming. The four categories of fraud are fraudulent expenses, personal expenses, multiple reimbursements, and overstating expenses. Does the process we just outlined provide assurance that each of these fraudulent acts will be detected? Do your accountants know how to spot a fake receipt?
Detection is only as good as the expense reporting system that you implement. If that system requires an employee to submit a reimbursement report with their own receipts, it is flawed. Fake receipts and personal expenses can easily slide through a system like that. Multiple and overstated submissions only show up after intense 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 will be buried in a mass of legitimate SaaS and other software subscriptions. Without detection, the only way to eliminate zombie spend is to cancel the company credit cards and start from scratch.
If you’re just starting out, we have a system for you that can prevent these problems before they happen. Established businesses can use the same system, but there is some work to be done before setting it up. Start by writing an expense policy that includes spending guidelines. We’ll explain how to use that and steps you can take to change your company culture.
How to use Ramp to prevent expense fraud
Imagine an expense system where every employee uses a company charge card, can upload receipts on their phone, and gets denied when an expense doesn’t qualify according to company policy. Think about the amount of money and time you could save with that system. That and much more is exactly what Ramp has to offer you.
It’s called finance automation. The days of manual expense reports and fake receipts are over. With Ramp, you can set spend controls that only allow purchases from certain vendors and merchants. You can upload your expense policy so that all employees have access to it, eliminating any kind of deniability they might have for not following it.
To top that off, we also provide you an online dashboard where you can track expenses in real time and an API that you can use to connect your expense platform to your accounting software. Expenses can be automatically processed, recorded, verified, categorized, and registered on the general ledger. That will prevent employee expense fraud.
As for those pesky SaaS subscriptions, switch the legitimate ones to a Ramp corporate card and cancel the old company credit card. This will help you get rid of your zombie spend and give you a fresh slate to start from.
Expense fraud is not something your small business should have to live with, and it should certainly never be accepted behavior. Cultures are hard to change. Switching to an expense management system that can’t be “gamed” will stop most of those employee spending behaviors that are costing your company money.
Ready to curb expense fraud? Sign up for Ramp for free today.