By Robert D Jones, CFE,CBM Each year employee theft costs companies big bucks. While the true extent of employee theft is unknown, researches estimate that it exceeds $30 billion annually. When other implicit costs are included, such as the investigation, possible negative publicity, and the probable interruption of normal business, the cost may be two or three times the amount.
One of the primary areas susceptible to employee theft is reimbursable business-related expenditures, including travel, supplies and entertainment. In large businesses, reimbursable expenses can be a significant amount of money. Unfortunately, most companies do not have a formal set of guidelines that outline what expenses are reimbursable, nor do they provide strict procedures for employees to follow when submitting expenses.
Instituted guidelines often are vague and not consistently enforced by company management. As a result, the potential for employee misuse is very high. As an example, a long-time, trusted employee of a major retailer with numerous locations stole hundreds of thousands dollars over a period of several years. The employee could have continued to abuse the reimbursement system had she not been caught as a result of procedural change.
Annual audits never uncovered the problem, which is not surprising because only 3 percent of all employee theft is discovered by outside auditors. A review of the retailer’s internal control structure was conducted after the resignation of the employee. Although there were employee reimbursement guidelines posted at the corporate offices, these guidelines were not uniformly implemented at the various store locations. As a result, employees were able to steal funds through several methods, including:
- Submitting more than one receipt for the same reimbursement.
- Submitting expense vouchers without adequate supporting documentation.
- Using company credit cards for payment and then submitting the invoice for employee reimbursement.
- Purchasing supplies from vendors that were directly invoiced to the company and submitting them as a reimbursable expense (this is also common with travel-related expenses).
Employers should be aware of the following key indicators in an employee’s personal lifestyle could suggest the potential for employee embezzlement:
- Excessive drinking or gambling.
- Maintaining a lifestyle beyond their means.
- Carrying excessive amounts of cash.
Key indicators in an employee’s work lifestyle that might indicate problems include:
- -Treating company finances as an extension of their own.
- -Attempting to spearhead all internal and external audits.
- -Submitting inadequate documentation to support expense reimbursement.
- -Initiating and approving payments to vendors
The following are some suggestions for improving your company’s reimbursement policies and procedures:
Establish clear guidelines. Management should provide strict written guidelines as to what expenses are reimbursable. The guidelines should also include procedures as to what documentation is to be submitted in order to obtain the reimbursement, and detail when the request for reimbursable expenses should be submitted. The guidelines should be consistent at multiple locations.
Expense approval check. Managers should review submitted expenses to ensure they are appropriate and that the supporting documentation is complete. Some companies allow employees to submit reimbursement requests with the understanding that supporting documents will be submitted later. This should be avoided as managers may forget to follow up on the required supporting documents.
Approval of reimbursement request should be in the form of a legible signature of the manger so that accounting will know the expense has been approved. Managers also should provide a contact person if there is a problem.
Reimbursement timeliness. A common problem is employees re-submitting receipts for reimbursement. Management should always request original supporting documentation. In addition, it may be beneficial for managers to set timeframes when expenses will be considered for reimbursement. Generally, 30 days following the expenditure should be sufficient.
Vendor-related expenses. In some instances, employees can purchase supplies from a vendor on the company’s behalf. In addition to the employee getting a receipt, the vendor sometimes sends an invoice directly to the company. As a result, there can be duplicate payments.
Employees should not be able to submit reimbursement requests for expenditures made through approved vendors. Vendors should bill the company directly. In some cases, employees will have legitimate out-of-pocket travel expenses, but they should not be allowed to pay large bills that could reasonable be billed directly to the company.
Company credit cards. Many companies issue company credit cards to employees to pay for miscellaneous supplies, travel and other related expenses. Most companies automatically pay the credit card company. Therefore, it is important that management review monthly credit cards statements to determine that the expenses are appropriate.
Under no circumstances should the employee use company credit cards for personal expenses. Implementation of these suggested internal controls is not guaranteed to stop employee theft. However, they will mitigate the potential for fraud.
About the Author:
Robert D. Jones, CFE, CBM has been involved exclusively in the field of Forensic Accounting and Corporate Investigations for over 25 years. He has worked extensively with insurance companies, public corporations and private companies, attorneys, and private individuals focusing his career on Financial Forensics and Investigations. He has testified on numerous occasions as an expert in civil and criminal matters. He is a proud U.S. Navy Veteran. Mr. Jones is also a California licensed Private Investigator.