Preventing Employee Fraud

​EVEN AS THE FISCAL CRISIS EASES somewhat, foreclosures, layoffs, and bankruptcies continue. Employees and businesses alike are feeling financial pressures, and both are being asked to do more with less. Some companies have even downsized their security and investigations functions when they should be staffing up. All of these conditions are cause for concern when it comes to employee theft and fraud.

When times are good, only a small subset of the employee population commits fraud. But during a fiscal crisis, a larger percentage of the work force may turn to illegal schemes that siphon funds from the company. Some employees may steal to pay their bills and put food on the table. Others may commit fraud to care for their children, parents, and siblings. These employees aren’t buying fancy cars or taking lavish trips. They are stealing to survive. If not for the economy, they would most likely never commit fraud.

The employee committing fraud due to the fiscal crisis will usually not have the time or the inclination to orchestrate complex fraud schemes. Thus, investigators trying to detect the fiscal-crisis fraudster should focus on three areas: employee expense reports, inventory and office supply theft, and employee benefits fraud.

Expense Report Fraud

The expense report is the most accessible vehicle for fraud. Due to its widespread and routine use, this method will most likely be the first stop for employees desiring to perpetrate fraud during a fiscal crisis. The top categories of expenses that are exploited during tough economic times are hotel and lodging, meals and entertainment, airfare, and car rentals and fuel. All companies should increase their due diligence and review for certain types of fraud scenarios.

For example, a common scheme is for an employee and a coworker—or an employee and an acquaintance—to share a room and both submit the same room receipt for reimbursement.

Another fraud scenario is for an employee to register for a five-night hotel stay, but stay only one night in a deluxe guest room. On day two, the employee moves to a smaller room and downgrades to a single bed at a lower rate for the remainder of the stay. The employee submits as documentation the itinerary for five nights in the deluxe room along with the first page of the deluxe room invoice. The employee pockets the difference between the deluxe room and the smaller room for four of the five nights. This same scheme can be used if an employee stays one night at an expensive hotel, checks out, and stays the remainder of the time at a cheaper hotel.

In another scheme, an employee eats with another person who picks up the bill. The other person gives the employee a copy of the meal receipt, and the employee submits it as an expense. Employees may also create receipts for meals and submit them for reimbursement. There are numerous Web sites available where an employee can create a fake receipt or download receipt fonts.

Air travel can also present an opportunity for fraud. For example, an employee may schedule and pay for airfare far in advance of travel. The employee then books a second airfare a week in advance of travel at a higher rate and on a different airline. The employee then cancels the more expensive flight, but uses that receipt for the expense report, pocketing the difference.

There is no surefire way to prevent or detect all fraud, but businesses can take steps to minimize the risk. The first step is to establish a business expense policy. A company must spell out what employees may and may not purchase.

Under the policy, lodging and airfare travel itineraries should never be used for reimbursement. The full hotel invoice must be submitted, not just the first page. The last four digits of employee credit card numbers should be on file, as should corporate credit card numbers so that auditors, investigators, and managers can compare receipts.

Companies should increase the review and sampling of employee expense reports. For example, companies should examine expenses for employees who are submitting high-frequency or high-dollar expense reports. Another fraud indicator is a drastic change in employee expense reimbursement amounts. Companies can use analytical tools to look for numbers and amounts that fall outside of their normal anticipated frequency.

Lastly, regardless of the employee reimbursement mechanism or benefit, a thorough review of all documentation must be done by the proper representatives. The smallest detail, omitted piece of information, or error could point towards an ongoing fraud scheme.

If an expense report looks suspicious, the company should take extra steps. For example, the company should review the time stamp on meal receipts and compare them to the meals being submitted. An employee having lunch at 8:00 a.m. can be a red flag. Each receipt should be reviewed for legitimacy. Reviewers should check the name, date, time, location, number of attendees, and last four digits of the credit card used to make the purchase. It is often helpful to generate an expense timeline to determine whether the expenses could have been made in the order and time in which they were documented.

When investigating airfare expenses, the company should check flight status, the fare purchased, arrival/departure information, refund status, any upgrade or downgrade data, and any supporting documentation. If using a travel agency, the company can ask the agency to issue periodic reports of refunded tickets, unused tickets, trips not taken, or credits issued. Another safeguard is to ask employees to submit their boarding passes with their expense reports.

Inventory Fraud

The second type of employee fraud likely to increase in a down economy is theft of inventory and supplies. Physically securing these materials is important, but that cannot be the only step taken, because the supplies can be misappropriated or misdirected before they even reach their secure physical locations. A fraudulent purchase can be disguised as a legitimate one, or money can be pocketed from a purchase that never occurred.

In one type of scam, an employee fills an online shopping cart with merchandise or services that appear normal and appropriate. The employee prints the shopping cart screen and submits this as the documentation for the purchase reimbursement but never actually places the order. A red flag would be that the documentation is lacking key information such as purchase method and estimated delivery date.

Another type of inventory fraud is when an employee files for multiple reimbursements over time for a single purchase, where they used their own credit card. For example, if the item is purchased online, the online confirmation of purchase is printed and submitted as an expense that requires cash reimbursement, then the email confirmation/receipt is submitted, and the packing slip that arrives with the actual purchase is also submitted.

Similarly, when employees are allowed to purchase office supplies and equipment using their personal credit cards, they can buy a quantity of usable office supplies, expense the total purchase after receiving the supplies, and then return a few of the items at some later date. Or, an employee can simply take supplies and inventory and sell the materials on eBay at a low cost. Employees buying supplies with the company’s card or with company cash may then reroute some inventory directly to their personal address, after which they can sell those goods and pocket the cash.

There are various ways to thwart these types of schemes. First, supplies should only be purchased with a company card or other direct purchase mechanism. Second, the company should carefully review purchase documentation for signs that the transaction has not been completed. Fax and print headers on invoices must also be reviewed, and documents must be examined for evidence of tampering.

Third, there should be a standard for what constitutes a “receipt” for reimbursement purposes. The company may decide to accept only the original transaction receipt, online screen print, packing slip, or historical purchase record. The company should choose one of these forms and refuse to accept any other document. Finally, there should be internal controls that involve more than one person, reducing the opportunity for an individual to divert inventory without anyone noticing that the amount ordered is not, for example, the amount received.

Benefits Fraud

The third and final area ripe for fraud during a poor economy is employee benefits. This often involves benefits that can easily be turned into cash. For example, an employee might falsify educational achievements to obtain fraudulent educational reimbursements. Grades, transcripts, and diplomas can be easily fabricated via computer.

Employees may also submit false training or conference registrations and actually take off from work for the proposed training. This scheme involves several fraud types, including expense report fraud, time and attendance fraud, and generating a false continuing education certificate.

If companies are unsure whether an employee attended training or a conference, they should contact the conference organizers directly for a second receipt and proof of attendance. Similarly, the company can review training or conference receipt information in conjunction with travel and other expected expenses.

During a difficult economy, fraud can mean the difference between profitability and negative earnings for a business. By understanding what types of fraud are most prevalent during a downturn and checking expense reports, inventory purchases, and benefits spending, security can keep employees’ financial pains from creating a fiscal crisis for the company.

Ryan C. Hubbs is senior staff internal auditor and investigator for Entergy in New Orleans, Louisiana.