Dec 27, 2023
5 mins

Business expense fraud: Everything you need to know

Expense fraud and the CitiBank sandwich
Quick summary

Business expense fraud is the corporate world’s version of a rotten apple. It creeps in and, without a peeled eye (spend control), lies undetected. Before you know it, it spoils the pack. In this article, we’ll teach how to spot, stop, and block expense fraud while managing business spend and spend policy with ease.

Table of Contents

    Picture this. It’s early Monday morning, and your sales team has just returned from a week-long trade show. Things went without a hitch, except for expenses, that is. Soon, you’re hauling in your colleagues to account for some shady-looking purchases and the classic — missing receipts. Not fun.

    The dodgy figures are probably an innocent mistake. But what if they aren’t? Business expense fraud accounts for a worrying 14.5% of all exposed fraud worldwide.

    Expense fraud is one of the latest dramas to hit the city. CitiBank recently won a wrongful dismissal battle against its former employee who had expensed two sandwiches and two coffees, initially claiming he had eaten them alone. The employee later admitted his girlfriend had also consumed some.

    In this article, we’ll address corporate expense fraud and how it can affect your organisation. We’ll also share some handy tips to make your team’s jobs easier and more efficient when managing business spend.

    See how fintechs revolutionise spend management & outshine banks

    Understanding the impact of business expense fraud

    A business expense fraud overview

    Business expense fraud, a.k.a. expense fiddling or an expense reimbursement scheme, occurs when an employee claims expenses they have no grounds to receive. The issue is rife. 85% of UK employees admit telling tales on their expense reports, and 5% lie on every claim.

    Worse still, employees can get away with expense fraud in plenty of ways. For example, it could look like:

    • Slipping personal expenses into a corporate transaction, e.g., using a company tech allowance to buy a personal tablet alongside a business laptop
    • Exaggerating the cost of goods and services like mileage and tips, then pocketing the difference
    • Intentionally submitting the same claim multiple times, e.g., via a paper receipt, then electronically
    • Deliberately flouting company spending limits, e.g., spending €300 on a corporate dinner when the expense policy only allows up to €200
    • Claiming for cancelled orders, e.g., unused flights and hotels
    • And many more crafty ways

    Common types of business expense fraud

    Let’s zoom in on some of the most popular forms of expense fraud:

    Ghost employees and padded payrolls

    Haunted houses aren’t the only places with ghosts; they can show up in your workforce, too.

    Staff can poof imaginary workers into existence to syphon resources. For example, in 2021, two UK workers were convicted of setting up phantom employees to defraud Oadby and Wigston Borough Council and the former charity Coping with Cancer of more than £40,000 (€46,750).

    It’s also not uncommon to see timesheet padding. Here, the employee adds unworked hours to their timesheet, often in small amounts to go unnoticed.

    Misuse of company credit cards

    These days, credit card fraud is a fact of life, especially in Ireland and the UK, which rank number one and two, respectively, on the Credit Card Fraud Capitals of Europe list. But what might surprise you is an employee going rogue with a corporate credit card.

    For instance, an employee could coerce a colleague to make personal purchases using their corporate credit card. A staff member could also steal a business credit card, rack up a bill, or use their own but fail to disclose the purchases.

    Inflated expense claims

    Another popular way expense fraud creeps in is through the opportunity to exaggerate claims. From facing financial difficulties to viewing expense fraud as no big deal, the rationale behind employees committing expense fraud varies. Worse still, a combination of relaxed spend control rules, inconsistent checks, and archaic documenting processes leave the door open for such expense manipulation.

    Fictitious invoices and receipts

    A close cousin of inflated expenses is fictional invoices and statements; in fact, these are the most common types of expense fraud. For example, an employee could:

    • Request blank receipts from a company, then falsify figures
    • Imitate a supplier’s invoice
    • Destroy or withhold documents
    • Forge a statement

    Kickbacks and collusion with vendors

    Not all partnerships are a match made in heaven. Some can be hellish, for your company at least. Why? Employees working in cahoots with suppliers to defraud through a transaction. For instance, let’s say your company buys stationery in bulk. An employee could order goods, have a vendor overstate the cost on the invoice, claim the funds, and split the proceeds with them.

    Factors contributing to the prevalence of business expense fraud

    While there’s no exact formula for expense fraud, some elements that make it easier to occur. Here are a few:

    Lack of effective internal controls and oversight

    Corporate spend visibility and a detailed expense policy are essential to combat expense fraud.
    Tools that control operational costs, monitor spending, analyse expenses, and collect proof of purchase are also critical.

    Yet, many businesses have a subpar setup due to a lack of digitalisation. Often, managers lack insight into each team member's spending, and they're overloaded with admin. Combine this with lax supervision, and you have the perfect storm brewing.

    Pressure to meet financial targets

    With a looming recession and cost of living crisis to contend with, businesses are feeling the pinch. The market instability has translated into tight budgets that aren’t always realistic. So, managers find themselves constantly over budget or stretching resources too thin to be effective. Think, budgeting €20,000 for a project that actually costs €45,000. These problems can tempt workers to commit expense fraud to cover the shortfall.

    Poor ethical culture within the organisation

    Expense fraud is a crime, but not everyone sees it that way. A corporate culture that ignores expense fiddling or encourages it can make some employees feel okay with claiming money they aren’t entitled to. For instance, you could have managers who set a bad example to other staff by purposefully flouting the company’s expense policy and signing off expenses they know are fake.

    Technological vulnerabilities

    With AI technology and advanced tech sweeping the expense management world, using paper and manual tools like Excel and email should be a thing of the past. Sadly, they aren’t. Only a small fraction of finance teams leverage cutting-edge tech and AI-backed solutions like Payhawk for internal fraud detection. Whether it’s a lack of awareness of available tools, resistance to change, or a combination of both, one thing is clear: archaic technology leaves businesses vulnerable to expense reimbursement fraud.

    The cost of business expense fraud

    We know employees syphoning cash through illicit expensing is damaging, but what exactly can it impact? Let’s examine some consequences of expense fraud:

    • Financial losses to the organisation: The average loss from expense reimbursement fraud was $40,000 in 2022. It may not seem like much, but when you consider expense fraud as just one of many cash leaks your business can experience, it’s easy to see how losses can pile up fast.
    • Reputational damage: Ever had a questionable stain on a white shirt? You can’t unsee it, and it’s difficult to remove. Worse, you’ll get some funny looks and even repel people. This is what expense fraud does to companies. It questions the business’s trustworthiness, makes customers cut ties, and causes prospects to reconsider partnering.
    • Legal and regulatory implications: Get caught up in an expense scandal, and your company and its employees could face more than embarrassment. Lawsuits, fines, criminal charges, and even prison sentences can be on the horizon, too.
    • Negative impact on employee morale: Often, the few commit business expense fraud, not the masses. Innocent employees are left to deal with the backlash, which can cause distrust, low employee retention, and recruitment challenges.

    How to prevent and detect business expense fraud

    Since expense fraud can come from many different angles, it's critical to take a multifaceted approach to combat it. To give you a headstart, we’ve compiled some essential moves to make:

    Implement robust internal controls and policies

    First up is a systems upgrade. Examine your current expensing processes and policies. Then, clarify rules and tighten up controls. As a rule of thumb, you should have a(n):

    • Clear spend policy, e.g., detailed lists of permitted and prohibited items, timelines, and spending limits to get everyone on the same page and eliminate confusion.
    • List of essential expensing documentation and submission deadlines to save employees time and factor expense processing into their work days.
    • Comprehensive business expense management software for simple, organised, and centralised processes.
    • Spend control alerts: so you know about (potential) overspends as they occur and can course-correct quickly.
    • Automated expense submission reminders to take the leg work out of securing documents.
    • Standardised employee reimbursement process to breed clarity and encourage adoption. E.g., an employee pays for items on their corporate card, submits a receipt digitally, and then your company repays onto the card.
    • Process to monitor management’s expenses to prevent abuses of power. For example, executives from different departments review and sign off on each other’s expenses.

    For instance, Chaos Group, an international provider of 3D rendering solutions, now saves five days per month in admin since optimising its processes with Payhawk’s corporate expense solution. Chaos Group’s finance team can now use this time and energy on other mission-critical tasks.

    Conduct regular monitoring and audits

    If you ever find spending checks taking so long you can’t get to other items on your to-do list, you’re not alone. But to combat expense fraud, it’s time to start over. Build an effective audit process and commit to a realistic monitoring schedule to stay informed on business spend. It’ll take a team effort, so get everyone involved. Here are some ways to level up your expensing reviews:

    • Encourage staff to submit expenses regularly
    • Set up automation, reminders, and alerts for document submissions and reviews
    • Have a process for investigating flagged expenses
    • Create anonymous whistleblowing channels

    Employee education and awareness programs

    Want to build a healthy corporate spending culture? Educate, educate, educate. The reality is that most employees don’t understand the risks of fraud to the company and themselves. Yet, only a small portion of businesses have training in place to prevent fraud and raise awareness. And get this: some employees believe expense fraud is acceptable because their company doesn’t seem to care about expenses.

    Clearly, there’s a disconnect between what some businesses say and do when managing expenses. Make your stance clear on business spend and expensing through comprehensive and regular training in accessible formats. Then, polish this off with internal business expense fraud awareness campaigns.

    Utilise technology for fraud detection and transparency

    In your fight against expense fraud, state-of-the-art technology will be the sharpest tool in your arsenal. So, look for solutions that make managing expenses quick and easy for everyone. Check out some emerging trends and technologies that combat expense fraud like:

    Data analytics and AI for fraud detection: The AI revolution in fraud detection makes trend analysis a breeze. Businesses are slashing the time they spend managing expenses and pinpointing fraud more accurately. This advancement frees up resources to reinvest elsewhere. Also, many companies leveraging AI in their fraud prevention strategies are still growing, creating a substantial competitive edge for early adoptees.

    Digital receipts for transparency: You probably know all too well how common lost receipts are and their impact on spend control. But thanks to new technology, missing data can be an issue of the past. For example, with Payhawk, you can easily upload unpaid bills to our platform directly from your inbox. On our mobile app, you can also use our AI camera to extract receipt data automatically.

    Automated accounting: Don’t let your team rely on memory when managing expenses. Use technology to set expense approvals, spend reimbursements, budget controls, spend alerts, and submission reminders on autopilot.

    Case studies and real-world examples of business expense fraud

    As the saying goes, “Experience is the best teacher”. So, let’s examine some high-profile expense fraud cases and the lessons learned from these successful investigations.

    Raiffeisen Bank vs. Vincenz

    Former Chief Executive Pierin Vincenz was fined and jailed in one of Switzerland's most noteworthy expense reimbursement fraud cases. His crime? Misusing corporate funds for some eyebrow-raising activities. A judge ruled that Vincenz’s expenses had crossed the line and weren’t in the company’s best interest. Vincenz’s spending spree included (in Swiss Franc (CHF))*:

    • A strip club visit: Nearly 200,000 CHF (€205,740)
    • Dinner with a Tinder date: 700 CHF (€720)
    • Hotel room repairs at Zurich Park Hyatt, following an argument between Vincenz and a strip club dancer he was dating: Nearly 4,000 CHF (€4,113)
    • A private jet during a cooking club trip to Mallorca: 27,000 CHF (€27,777)

    *We calculated CHF to GBP conversions using current rates so that they may vary slightly from the original figures.

    Key lessons

    • Outline personal versus corporate expenses clearly
    • Set strict spending limits with alerts for all, including C-suite
    • Control credit and debit cards
    • Address any unusual spending activity quickly

    UK Parliamentary MPs’ expenses scandal

    It’s hard to talk about expense fraud without bringing up the UK’s MP scandal that shook the nation during a global recession. Some MPs spotted loopholes in the government's expense policies, leading to widespread misuse. Unwarranted second home allowance claims, nanny services, TV sets, and property developments were all in the mix. Criminal charges, firings, resignations, fines, and repayments soon followed.

    Key lessons

    • Don’t leave room for doubt or interpretation in your expense policy
    • Consider and close all loopholes
    • Set up a quarterly expense policy review to keep terms up-to-date
    • Keep staff informed on what counts as acceptable expensing and the consequences of non-compliance

    The importance of proactive measures to combat business expense fraud

    Business expense fraud is a common issue, and the fallout can be ugly. Knowing what to look out for will not only help your company pinpoint schemes faster but also have the tools ready to fight back.

    Thanks to technological advancements, your options for tackling expense fraud have skyrocketed. So, do away with manual, labour-intensive tools and processes and let a purpose-built spend management solution do the heavy lifting. Educate your employees and keep iterating your spend policy. Soon, you’ll have an expense fraud management system that’s a force to be reckoned with, keeping your company’s cash away from sticky fingers.

    Curious about how an expense management solution could pay off in your business? Book a demo.

    Trish Toovey - Content Director at Payhawk - The financial system of tomorrow
    Trish Toovey
    Senior Content Manager

    Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.

    See all articles by Trish →
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