Your employee’s expenses from the latest business trip are not adding up. You’re suspicious that they made several unauthorized purchases right under your nose. If your suspicions are correct, your employee committed expense fraud.
What Is Expense Fraud?
Expense fraud is when an employee falsifies a business expense. In some cases, the employee will commit this fraud accidentally, either by submitting invoicing errors or making purchases that they were unaware the business wouldn’t authorize (for example, a meal while traveling). In other cases, the fraud is intentional, and the employee has committed it for their personal gain.
These are some examples of expense fraud:
1. Unauthorized Travel Expenses
The employee uses company funds for unnecessary expenses while traveling on business. An unnecessary expense could be a first-class ticket upgrade or a premium hotel stay. Some employees may even use company funds for trips that were not done expressly for business purposes, like a personal vacation.
2. Unauthorized Personal Expenses
The employee tries to get the company to foot the bill for personal expenses by claiming they are business-related expenses. This could be paying for meals under the guise of “business lunches” or personal tech as “business equipment.”
3. Falsified Receipts and Invoices
When an employee submits reimbursement claims for purchases using altered receipts, fake invoices or overblown costs so that they receive more money from the company.
4. Duplicate Reimbursements
An employee submits the same expense multiple times in order to receive more reimbursement than necessary.
How Can You Respond to Expense Fraud?
Employers that suspect expense fraud shouldn’t accuse an employee of bad actions right away. It’s never a good idea to accuse an employee of ill intent without clear proof. Not only will that damage the relationship that your company has with this employee, but it can also damage the relationship with other employees in the building. Negative accusations will upset the entire staff’s morale.
So, what can you do if you suspect expense fraud? Don’t make any hasty decisions. Start by conducting an investigation into the matter.
The investigation should involve discussing the problem with the employee. Talking to the employee will help you determine whether they made an honest mistake or an intentional act of fraud. It’s important to consult an HR expert during this process to make sure that you are complying with company procedures and labor laws.
Employment Consequences
If fraud is discovered, but you believe the fraud to be accidental or minor, you can choose to keep the employee on staff. You may want to provide disciplinary actions like writing them up with a warning, putting them on probation or suspending them temporarily.
If the fraud is deliberate and severe (either the monetary amount is very high or there is a repeated pattern of expense fraud), then you may want to consider termination as an appropriate response.
Legal Consequences
When the fraud is deliberate and severe, employers may also want to consider taking legal action against the employee. You can file a civil lawsuit for breach of contract or fraud. If a judge sides with your case, the employee (likely ex-employee at this stage) may be court-ordered to repay the fraudulent expenses.
Recouping Lost Expenses
Disciplining an employee for expense fraud will not bring the money back. So, how can you get the lost funds back into your accounts?
The first thing that you should do is set up a repayment plan with the help of your employee. You cannot automatically deduct wages from an employee’s paycheck in order to recoup the losses. You will need an employee’s consent to make paycheck deductions. So, make a documented repayment plan with the employee to get the funds back in a reasonable timeframe.
If the employee has been terminated, you can turn to a professional debt collection agency for help. Look for a debt collection agency that offers employee debt recovery services. The agency can contact your ex-employee and set up a reasonable payment plan so that you can recoup your losses.
A debt collection agency can also enforce court-ordered repayments. So, if you win your legal battle against an ex-employee, a debt collection agency can collect those payments for you.
How a Professional Debt Collection Agency Can Help
Debt collection is a delicate process. It’s not something that should be attempted by nonprofessionals.
A professional debt collection agency can recoup funds from debtors while complying with federal and state-specific regulations, including the Fair Debt Collection Practices Act (FDCPA). Their methods will not only be ethical, they will also be effective.
There are some specialized services a debt collection agency can offer your company, like skip tracing. Skip tracing is useful when an employee has left your company without repaying what they owe and you are unaware of their current contact information. With a skip-tracing department, debt collection agents can find the location and contact information of the ex-employee in order to get repayments. So, if your ex-employee is MIA, an agency can find them.
How Can You Prevent Expense Fraud?
Fraud is not something that your business can afford to ignore. A 2023 survey by the Association of Certified Fraud Examiners (ACFE) estimates that organizations lose approximately 5% of annual revenue to employee fraud every single year. That’s a considerable loss.
The good news is that the loss is avoidable. When you take certain steps, you can minimize the risk of expense fraud from employees. Your organization’s revenue shouldn’t suffer the consequences.
So, what can you do to minimize the risk of expense fraud?
Establish Clear Expense Policies
You’ll want to have clear expense policies that employees can reference in an employee handbook or digital guide. The policies should list examples of acceptable and unacceptable expenses for the employer to cover. You want to limit any guesswork for the employee so there is very little room for misunderstandings.
Ask for Pre-Approval
One of the policies you should implement is pre-approval for major purchases. This way, the employee will have to discuss their intentions to purchase an item on the company’s dime. If approval is given, the employee has the authority to go forward with the purchase.
Conduct Meetings Before Business Travel
Before any employees travel for business reasons, set up a meeting where you discuss parameters for employer expenses. These parameters should include a list of acceptable reimbursable purchases and spending limits.
Invest in Receipt Tracking Software
Instead of having employees submit invoices with expense claims, use receipt tracking software. This software option will make it difficult to ask for more money than what was spent. It will also prevent duplicate claims. Use receipt tracking mobile apps so that employees can record their receipts on the go.
Expense fraud is a serious problem. If you think that one of your employees is falsifying business expenses, you need to run an investigation and take action. You can recoup any financial losses and prevent the problem from getting out of hand.
