3 Ways to Prevent Expense Fraud

From the co-founder of Penny Inc John Battley.

Dealing with expense fraud in a small to midsize business can be particularly difficult for several reasons:

First, the policies and procedures for identifying and dealing with expense fraud are often not well developed and accountants still tend to favour expensive old school expensive, bureaucratic and cumbersome solutions. Managers and directors usually have their hands full with day to day operations and don’t have the time required to fully flush out and execute comprehensive expense review process.

Second, employee expenses are often spread across company credit cards, personal credit cards and various forms of petty cash. Reconciliation happens reactively often months after expenses have been reimbursed, credit card bills paid or the cow (cash) has already left the barn.

Third, directors, managers and employee have very close personal relationships and little to no redundancy with key roles and responsibilities. Those in charge can be very hesitant to question and individual’s expenditures fearing personal or professional backlash.

In combination these factors make SMB’s more susceptible to employee expense mismanagement whether intentional or unintentional. Often discrepancies are overlooked or ignored until it’s too late. Often harsh measures must be utilized to redress a situation that has gotten out of control including firing individuals, civil suits and even criminal prosecutions. Such actions often further harm the SMB with loss of productivity due to the distraction of managers and directors, the loss of key personnel and a diversion of resources outside of the revenue generating operations of the business.

For these reasons I say reactive employee expense fraud prevention is broken expense fraud prevention. For SMB’s that really want to prevent expense fraud they must implement a proactive system that greatly reduces or eliminates the likelihood that expense privileges will be misused.

Fortunately Fintech (financial technology) has rapidly evolved in recent years bringing together the elements to make proactive expense prevention possible. To take advantage of these tools SMB’s have to think proactively and redesign their business processes[suggest this be removed as the argument is that they are already time poor so a redesign of BP will switch them off – replace with] using available technology for maximum effect.

In a nutshell, here is what you have to do:

  • dopt a system of expense pre-authorization. Each employee should be required to request funds in advance of their use in a way that conforms to company policy. Throw out expense reporting in favor of expense authorizing.
  • Get debit cards. Eliminate the use of personal and corporate credit cards and tie your expense authorization process to employee debit cards. This way you see where the money is going before it is spent. In addition, debit cards can be limited to certain types of spending, have daily limits or even be deactivated instantly if the need arises.
  • Document and categorize at the time of the transaction. Do not allow employees to collect receipts over a period of weeks before submitting them, it’s too late by then. Receipts for employee purchases should be documented seconds or minutes of the transaction occurring which is possible through the use of mobile applications.
  • Get real-time with your accounting. Employee expense data, inclusive of the transactional information, documentation and expense categorization should be captured into the SMB’s accounting software in real-time. This way, workflow rules with exceptions that put your bookkeeper’s or accountant’s eyes on questionable transactions can nip problems in the bud.

Implementing an expense management system that employs these elements allows your organization to simply avoid expense fraud problems in almost every case. Further, it puts the entire organization on its front foot when it comes to expenditures ensuring there are no nasty surprises at the end of the month or quarter.

-John Battley

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