Prevent, Reduce, and Stop Expense Report Fraud using Expensify

I was talking with a user today and the subject of expense report fraud came up. Specifically, how can Expensify be used to fight it?

Great question, and the short answer is: avoid cash and use Expensify Guaranteed eReceipts.

But stepping back a bit, let’s review the problem. As incredible as it sounds, the ACFE estimates that over $100B is lost annually to expense reimbursement fraud. Yes, Billion. T&E Magazine also report 20% of companies say outright false expenses are commonplace. So fraud is an enormous problem, and if you don’t think it’s affecting you right now, there’s a good chance you’re wrong. Indeed, it’s quite possible you have no way of ever knowing. 

What Can Be Done About It?

There are as many schemes as there are expense reports, and there is no silver bullet to stop it all in its tracks. But the most common schemes can be prevented by mandating common-sense expense policy in a way that is respectful of the employee’s privacy and not a waste of their time. Namely:

1. Import expenses straight from employee’s credit cards.
2. One-purchase one-expense.
3. Discourage cash and capture receipts.

Taking each of these in turn.

1) Import expenses straight from employee’s credit cards

The key to fighting fraud is tamperproof documentation: if the employee is ever in a position to manually enter expense amounts, the risk of mistake or “mistake” is just too high. Accordingly, mandate purchases be done electronically, and then import those electronic purchases directly from the bank into your expense report system.  Expensify can import 94% of US credit cards, and offers IRS-ready, Expensify Guaranteed eReceipts in purely electronic form — without the hassle of easily-forged paper receipts. Not only is it faster and more convenient for your employees to make purchases with a credit card, you get tamperproof documentation straight from the source.

2) One-purchase/one-expense

Mandate that employees make a separate purchase for each item they intend to expense.  Combined with (1), it ensures each purchase has a separate, tamperproof eReceipt.  In particular: don’t bill meals to hotel rooms, don’t combine personal and business expenses into a single purchase, and basically don’t do anything that will need to be undone later.

(Though it seems convenient at the time to do this, it just passes the buck off until later: when filing the expense, they’ll need to manually separate them back out anyway, so that “convenience” actually just creates more work for everyone in the end.)

A one-purchase/one-expense policy saves the employee from needing to manually split expenses at the end of the trip, and helps ensure each purchase is separately documented in a tamperproof way.

3) Discourage cash. Capture receipts instead

Virtually everyone takes credit cards anymore, especially in the US.  Even taxis in most major cities take credit cards.  There’s almost no need to pay for anything on a typical business trip with cash, so cash purchases should be strongly discouraged and flagged for special attention in the approval process.

That said, in some rare occasions, cash can’t be avoided.  In these cases, require the employee to capture an image of the paper receipt at the time of purchase, so there is no opportunity for a key receipt to be “lost” prior to reimbursement.  It’s almost impossible to get a phone without a camera anymore; just have them take a picture of the receipt before putting it in their pocket.  The iPhone 3GS and Palm Pre have excellent cameras with auto-focus, and other phones often have “macro lens” attachments that enable good closeups (eg, the “Griffin Clarifi” case for the iPhone 3G).  Expensify also has an iPhone application (BlackBerry on the way!) to simplify this further.

These three rules are handy because they not only reduce opportunity for fraud, they’re actually the most convenient way for an employee to create expense reports.  It’s a true win/win situation: employers get better records, and employees create those records faster than they could have by hand.

To drive some of this home, let’s take a look at some of the most common forms of expense report fraud and show how these rules implicitly prevent it, without any extra work (and indeed less work) to any party:

• Tip inflation. Write a small tip into the merchant copy of the receipt, and a large tip into the customer copy turned in for reimbursement.  Expensify Guaranteed eReceipts prevent this because they show the actual amount paid by the employee, not just what’s written on the receipt.
• Taxis. Most taxis just give you a blank receipt at the end of the trip and it’s up to the employee to write in however much they spent. Paying by credit card produces a verified eReceipt.
• Collusion. Where multiple employees share an expense (taxi, hotel room, internet, etc) but report it separately.  Again, paying by credit card and producing an eReceipt prevents this.
• Duplication. It’s easy to copy a paper receipt and submit it in two separate expense reports.  Expensify only allows each expense (and corresponding eReceipt) to be added to a single report, implicitly preventing accidental or intention expense duplication.
• Forgery. I won’t go so far as to link to any, but a quick search turn up countless services for creating authentic looking receipts for just about anything.  And what the services can’t do, Photoshop can.  Expensify Guaranteed eReceipts are verifiable — if there’s ever any doubt that the purchase is for real, we can trace it on command all the way back to the original electronic purchase recorded by the bank.

And so on.  Expensify helps you keep expenses in electronic form all the way from purchase to reimbursement.  Not only does this deter fraud and reduce error (which is equally important), it simplifies the lives of everyone involved.

Does this make sense, and do you agree?

– David Barrett (dbarrett@expensify.com)

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