Preventing Employee Fraud in Expense Management Leveraging Fraud Prevention Best Practices and Expense Reporting Automation to Control Company Spend Featuring insights on...»» Causes and Risks of Employee Fraud in Expense Reporting»» The Benefits of Expense Reporting Automation for Preventing Employee Fraud»» Fraud Prevention Best Practices Underwritten in part by
Contents Introduction 3 Fraudulent Employee Spend Today 4 Best Practices to Prevent Fraud 8 Conclusion 11 Profile 12 About PayStream Advisors 13 2
Introduction In today s fast-paced, globalized market, organizations are under increasing pressure to become more productive and efficient. Many companies have tried to reduce back-office costs and manage financial processes more efficiently as a means of maintaining their competitive edge. However, for organizations in all industries, one of the hardest back-office costs to control is employee spend. Non-compliant and inefficient employee spend can be caused by a variety of reasons, including lack of visibility into purchasing activity, unstructured or poorly communicated spend policies, and purchasing from vendors that are not strategically tied to preferred vendor lists or contracts. However, one of the prevailing causes of lost revenue is intentional employee fraud, which can be difficult to control and detect. Inefficient and non-compliant spend can occur without planning or malicious intent, such as when an organization does not have strong purchasing guidelines in place and an employee spends over budget. However, in the case of fraud, employees have learned the weaknesses in their company s purchasing controls and expense reporting methods, and have exploited them for their own financial advantage. According to research conducted by Chrome River, expense fraud costs the U.S. economy $2.8 billion each year. The average amount lost to each fraudulent employee is $2,448, but only roughly 17 percent of those employees are caught by their employers. Issues related to inefficient spend and unintentional employee errors can often be prevented by an automated expense management solution through the creation and enforcement of policies, more transparent purchasing guidelines, and built-in controls. However, when employees intentionally misuse company money for their own benefit, such as by making personal purchases on a corporate credit card, the organization is dealing with a more dangerous problem. Stopping fraudulent expense reporting requires an expense management solution that has advanced fraud controls built into every feature. This report explores advanced expense management solutions with features designed to prevent both inefficient and fraudulent spend. These features include integrated company policy controls, configurable approval workflows, and full transparency for auditing purposes. 3
Fraudulent Employee Spend Today In order to gain a better understanding of the current of state travel and expense management among North American businesses, PayStream Advisors conducted a survey of over 100 professionals from many different industries. This research revealed that the majority of organizations have difficulty managing company spend due to manual processing, poor visibility into spend, and the inability to enforce company travel policies, see Figure 1. Figure 1 Top Expense Management Challenges Many Organizations Struggle with the Inability to Enforce Corporate Travel Policies What are the top three biggest challenges your organization faces in the expense management process? Manual data entry and inefficient processes Lack of visibility into spend Inability to enforce corporate travel policies Increase in overall T&E 30% 38% 36% 52% High cost of processing an expense report 18% Lengthy reimbursement cycles 12% 4
Chrome River s research shows that among organizations that cannot enforce corporate policies, the most common types of expense fraud are when employees use company money to make personal purchases, fuel personal travel, tip over company policy, and spend beyond item limits, see Figure 2. Most Common Instances of Expense Reporting Fraud Figure 2 Personal purchases claimed as business expenses 45% The Most Common Instances of Fraud Are Related to Personal Employee Expenses, Mileage, and Tipping Additional mileage Tips higher than what was actually given 29% 35% What are the most commonly committed instances of expense reporting fraud in your organization? Submitting more than allowed for an item Receipts for cancelled trips or events / returned items 10% 28% Some of these offenses may cost companies only a few cents or dollars at a time, and they can seem like inconsequential discrepancies to the employees. However, these actions can add up to millions of dollars a year when spread throughout an organization s entire workforce. When employee spending is left unchecked for too long, some move from simple innocent policy breaches to illegal endeavors that are much larger and more financially crippling for their employers. For example, it is common for employees committing fraud to start with a series of low-value amounts (often $10 or less) to see if they can pass these through undetected. If these are unsuccessful, the consequences are often minimal, but if the expenses pass through successfully, the values may escalate. This is a similar pattern to credit card theft the thieves quickly run a series of low-dollar items to see if the card is still valid, and if that is successful, they gradually ramp up the charges. 5
The main reason organizations have difficulty enforcing company spend is manual expense reporting processes. When there is no electronic monitoring system, employees have a greater ability to move around company controls undetected, manipulate existing expense reporting workflows, and use company assets for their own gain. Chrome River s research confirms this the company reports that the majority of employees who have admitted to defrauding their companies use manual, uncontrolled methods of expense reporting, such as submitting images or hard copies of receipts with a spreadsheet, or by giving receipts to an administrator or secretary to compile. Both of these methods are hard to monitor and control, and rarely include enough detail to indicate fraudulent activity. The most reliable way to identify fraudulent expense reporting activity is through extensive and consistent auditing of expense reports and receipts. However, PayStream has found that only 42 percent of companies audit all of their expense reports, see Figure 3. Figure 3 Less Than Half of Organizations Audit Every Expense Report What percent of expense reports do you audit? Percentage of Expense Reports Audited 100% 42% 61% to 99% 7% 31% to 60% 13% Up to 30% 24% None 14% 6
Among those organizations that do not audit 100 percent of their expense reports, the methods for selecting which reports to audit are varied, though most often it is done at random, see Figure 4. This inconsistent approach leaves organizations vulnerable to a much greater chance of missing repeat offenders or large-dollar fraud. Selection Process for Which Expense Reports to Audit Random 31% Figure 4 Most Organizations Select Expense Reports to Audit on a Random Basis If you audit less than 100%, how do you select reports to audit? Certain expense types trigger an audit We don t audit Selected users Over total dollar threshhold 10% 17% 16% 19% Policy violations 7% Many times, organizations do not audit all of their expense reports because they lack the resources to consistently support such a timeintensive process. In cases such as these, an organization should have a strategic method for determining which reports to audit. An appropriate scenario would entail an organization defining a statistically valid sample size for auditing, then having auditors from outside of AP meticulously examine the expense reports and receipts. When organizations do not put effort into strategically controlling expense reporting throughout the entire process, they leave themselves open to the devices of fraudulent employees. 7
Best Practices to Prevent Fraud PayStream has found that the most effective way to combat uncontrolled employee spend and fraudulent expense reporting is through the use of an advanced expense management solution. These solutions not only enforce company policy from the front end, but also enable more streamlined and effective auditing on the back end. PayStream s research shows that organizations that automate their travel and expense (T&E) processes have much greater visibility and control over spend and company policies, as well as a greater ability to detect and prevent fraud, see Figure 5. Figure 5 Many Organizations Achieve Improvements in Travel Policy Enforcement with Expense Reporting Automation What are the top three benefits you have achieved or expect to achieve by automating your T&E process? Top Benefits Achieved Through Travel and Expense Reporting Automation Improved visibility over spend 64% Quicker reimbursement of employee expenses Better ability to enforce travel policies Lower processing costs 49% 58% 55% Improved employee satisfaction 44% Increased corporate card usage and rebates Improved ability to detect and prevent fraud Better compliance with regulatory requirements (SOX, FASB) 32% 30% 26% Ability to negotiate volume discounts with vendors 17% Reduction in late payment penalties and interest 8% 8
In order to provide a clear picture of the possibilities of automated expense reporting, the following best practices illustrate how today s leading expense management software can help organizations control employee spend. To improve expense management control, organizations should: Require pre-approval. Pre-approval can be obtained in a variety of ways, including the use of a travel booking tool and pre-trip approval workflow, and implementing a corporate card program for all employee purchasing. Many advanced travel and expense management (TEM) solutions make travel booking tools available through partnerships, and these tools can integrate with internal approval workflows in order to control travel purchases before they are made. Corporate cards allow approvers to get a more accurate, real-time picture of where spend goes. In addition, corporate cards can be restricted to certain spend categories, thus preventing employees from making many types of personal purchases with company funds. Automate policy enforcement. Advanced TEM solutions alert users to compliance issues in both travel plans and expense reports, giving employees opportunities to adjust or explain out-of-policy entries. The solutions give real-time insight into project or departmental budgets so that employees have less risk of overspending. They also clearly identify non-compliant expense reports after they have been submitted, allowing approvers and auditors to automatically send the reports back to users for correction. In all, there is very little chance that non-compliant and/or fraudulent expense reports will ever be fully processed without being caught. Help employees make good decisions. Built-in policy controls in TEM solutions not only prevent fraudulent spend, but they also help foster more conscious spending behavior among employees. Many solutions alert employees of the non-compliant purchase before it is reported to the approver such as when they are creating a travel request allowing them to adjust their behavior before they are penalized for it. This promotes a more disciplined corporate culture, and helps to consistently reduce fraudulent efforts by employees in the long run. Clearly document the approval process. TEM solutions come with an advanced, configurable business rules engine that allows expense items to be routed for approval based on criteria such as manager, department, amount, expense type, client, project, matter, grant, or any 9
other logistical criteria. The system tracks every action of the approval process for future review, and ensures that every approver and auditor can see all out-of-policy spend. Centralize the travel expense process. One of the greatest advantages of a TEM solution is how it enables an organization to bring all spend under one roof. Cloud-based software allows multiple departments to use the same system from a single sign-on interface, and mobile capabilities automatically integrate on-the-go expense reporting with the main TEM system. In addition, most TEM solutions are highly customizable, meaning that the solution s interfaces, templates, controls, and workflows can all be configured to any company s diverse requirements. This level of configuration can extend from visual design to advanced auditing and reporting capabilities. Examine a sampling of reports each month through an auditor. TEM software greatly decreases the amount of time organizations must spend auditing expense reports and receipts by offering rulesbased tracking tools that monitor and report expense violations. However, advanced TEM solutions also offer auditing modules that enable organizations to create more streamlined and focused auditing processes. These tools use a rules-based workflow to direct a specific sampling of reports for audit reporting. Audit workflow sampling can occur at either the pre-payment or post-payment stage for added process flexibility. 10
Conclusion After an organization has realized the advantages of expense reporting automation for spend control, the final step is preparing internal parties for adoption. This not only requires properly educating company executives of the potential savings in hard and soft costs, but also includes transforming any corporate culture that may resist a more controlled expense reporting process. According to Chrome River s research, most fraudulent employees tend to fit into a similar profile. The majority are middle-aged male employees, and while all company levels are affected by this problem, the top offenders work in upper management and executive positions, such as a senior vice president role. Richard B. Lanza, an expert on fraud in financial processes and author of the book Cost Recovery, states that expense management software adoption is often inhibited by a company s culture because fraud is so prevalent in upper management. When the attitude of non-compliance comes from the top down, control can be even harder to maintain among the rest of the workforce, resulting in very little support for automation initiatives overall. In order to proactively promote expense management adoption, key decision makers must be educated on both the need for controlling spend on all levels and on the enormous savings possible with a TEM solution. It is important that all parties understand the long-term value of improved control of spend for company revenue, morale, and competitive advantage. 11
About PayStream Advisors PayStream Advisors is a technology research and consulting firm that improves the way companies plan, evaluate, and select emerging technologies to achieve their business objectives. PayStream Advisors assists clients in sorting through the growing complexities of IT applications related to business process automation with the goal of making objective, analytical, and actionable recommendations. Wherever business process automation technology is an issue, PayStream Advisors is there to help. For more information, call (704) 523-7357 or visit us on the web at www.paystreamadvisors.com 12