How an audit trail can help with fraud detection
Expense fraud is the purposeful act of misrepresenting reimbursements to make a profit.
The type of fraud above accounts for 11% of fraud in large businesses, according to the Report To The Nations 2018 Global Study On Occupational Fraud And Abuse.
There are various types of expense fraud, according to the ACFE; these include:
- Overstated expenses. These claim for a larger figure than was incurred. These are easy to spot because the receipt doesn't match the claim. An exception is a mileage claim, where the business has to trust the employee about the distance traveled
- Mischaracterised expenses. These are expenses that have been misused, for example, if a dinner for a client is hiding a dinner with a date, or a gift for a business partner has ended up with a family member instead
- Fictitious expenses. When someone claims something that hasn't happened
- Multiple reimbursement claims. If someone submits the same expense more than once
By following an audit trail, you can help prevent any of the above examples of expense fraud, except perhaps mischaracterized expenses
Examples of how an audit trail can help prevent fraud
By accessing the receipt and the submitted details, the owner, financial controllers, and auditors can make checks to ascertain the veracity and validity of the claim, helping identify errors and, significantly, fraudulent activity.
Take, for example, your fictional Marketing Manager, Luisa. She had dinner by herself during a new business pitch and submitted a receipt for £155. Any savvy financial controller can quickly spot this through their expense management system and follow the trail into the scanned paper receipt.
With 2019 data showing 43% of companies manually manage expense reporting, it's clear that the potential for human error is always possible if companies haven't implemented expense management software and audit trails.
Your Account Manager Melissa has been taking clients out a lot in the last few months, even though the accounts she's managing are spending less than they used to. A quick check of the receipts reveals that some were missing, and some pertain to locations and times of the day (or night) that don't make sense based on any client's location.
Meanwhile, Sales Lead Alfredo has been claiming a lot of petrol receipts, based on a few short trips visiting clients. Alfredo submits the receipts from the petrol station, so it's hard to dispute or open the conversation about it.
Examples of audit trail user cases like these show the level of transparency and accountability that expense audit trails give both finance teams and the wider employee base. And it also shows how the quality of financial control relies on the integrity and accuracy of the audit trail.
Tips for creating an audit trail in expense management
You can easily create an effective audit trail by following these tips:
- Make it convenient for those involved in the transaction to obtain and submit proof. This way, employees will input good data into your chosen solution and want to stay compliant. Automating much of this process is even more ideal as you eliminate room for human error
- Offer user-friendly solutions for finance controllers. The ideal audit trail is digital so that finance teams can access reports everywhere and apply filters to arrive at the information they need quickly
- Make it complete. Use one solution to help you collect and chase all the required information and proof of purchases
How technology can assist in creating and maintaining an audit trail
Thankfully, expense audit trails are made of just a few steps. And spend management solutions like Payhawk can automate and maintain these steps without error.
At the point of sale (whether physical or digital), the employee can obtain a receipt, with few exceptions. Then, the employee can submit a claim, categorizing the receipt and explaining the context, if needed.
Luisa made the embarrassing mistake of mistyping the expense amount. This scenario couldn't happen with OCR technology as it pulls out all the info from a receipt photograph.
Alfredo would have been dissuaded from his petrol receipt claims (and gifted with an improved user experience instead), as the business travel features can calculate the fairest estimation of costs.
Traveling employees only need to add the start and end points (and any other stops), and the software can automatically calculate the exact business travel expense and reimbursement amount.
With expense management from Payhawk, you can also monitor every business expense and transaction as it happens in real time. A sudden spike in expenses will trigger an alert and, if needed, a conversation.
Preventing expense fraud before it even happens
Besides following a digital audit trail, expense management software combined with corporate cards can not only detect expense fraud but also help prevent it.
Corporate cards empower employees to use assigned budgets to do their jobs effectively. They can be used not only for traditional expenses such as meals, transport, and entertainment but also for online subscriptions, marketing campaigns, or training programs.
Corporate cards and expense management software also allow finance teams to set spending limits and leverage other controls.
Sales Lead Melissa, whom we mentioned earlier, wouldn't have been able to use the company's card in a nightclub at 2 am, as she needed that permission set for her card. She could ask her manager for extraordinary approval, but suspicions would be raised with her client nowhere to be seen.
With expense management software, you can build in spend policies and manage card controls such as recurring limits, ATM withdrawals, and the approval chain for requests, putting reliable and reasonable financial and operational boundaries in place. After all, preventing business fraud is always better than detecting and trying to fix it later.
Ready to take the next steps in nailing expense management?
With Payhawk, you can stay firmly in control of your expenses with our powerful all-in-one spend management software. Book a demo to get started.