Internal Controls for Small Businesses - Part II: Purchasing Cards and Time & Expense Reimbursem
If your company uses procurement cards (p-cards) and has staff that submits time and expense (T&E) claims for reimbursement, you should be aware that these are two primary avenues for employee fraud.
According to the Association of Certified Fraud Examiners (ACFE) 2014 “Report to the Nations on Occupational Fraud and Abuse,” expense reimbursement fraud accounts for 16.7 percent of all fraud uncovered for small organizations (small is defined as an organization with fewer than 100 employees). For large organizations (an organization with more than 100 employees), expense reimbursement fraud account for 13.9 percent of all fraud. The median time it takes to discover expense reimbursement fraud schemes is 24 months.
How are procurement card and T&E fraud detected? According to the ACFE study, fraud detection methods used by small organizations differ from those used by large organizations. For small organizations, fraud primarily is detected through management review, account reconciliation, accident, external audit and document examination. For a large organization, fraud is detected primarily through tips received internally from employees or external sources (such as customers, vendors, or competitors) and through work performed by the internal audit department.
[if !supportLists]· Proper tone at the top.
[if !supportLists]· Review expense reimbursement requests for
[if !supportLists]· Implement a whistleblower policy and hotline.
[if !supportLists]· Communicate T&E, purchasing, and whistleblower policies
periodically to employees and make these policies highly
Proper tone at the top refers to management’s attitude toward business practices, such as ethics and business conduct. Management needs to communicate that it cares about internal controls and that any deviation from company policies is unacceptable.
Review expenses submitted by employees. According to ACL, an organization that provides data analytics, governance, risk management, and compliance software, the following methods can be used to detect fraudulent employee expenses:
[if !supportLists]· Compare data from various systems. For example, compare data from the accounting system to human resources
department data to find instances when an employee on
vacation is using a p-card or incurring travel expenses for
[if !supportLists]· Compare employee descriptions of expenses with the data
available on merchant codes and expense categories.
[if !supportLists]· Identify large expense transactions that are divided into
smaller amounts that are just under the review/approval
[if !supportLists]· Look for unusual patterns in per-employee expenses in the
same department (or role).
[if !supportLists]· Review employee expenses paid with p-cards that also are
claimed on an employee T&E form.
[if !supportLists]· Review the use of fuel cards – calculate expected mileage
based on the volume of fuel purchased and compare that to
expected travel patterns.
[if !supportLists]· Look for expenses incurred in non-standard locations and
[if !supportLists]· Review for expenses/claims for airfare where there is no
corresponding hotel or meals charged or business purpose.
[if !supportLists]· Look for mileage claims for the same period that car rental
or other transportation costs were incurred.
[if !supportLists]· Review changes to approval rules within your accounting
Small organizations also should implement a whistleblower policy and a hotline, just as large organizations do. Whistleblower policies let employees know that management encourages them to report wrongdoing without fear of retaliation. Employees should have a method to make confidential and anonymous reports.
Company policies should be made highly accessible to employees. Post the policies in breakrooms, on the company intranet, and publicize them through periodic team meetings or training sessions.
If you have questions regarding implementing or reviewing your internal controls, please schedule a call with me at GritForce Bookkeeping here. I would love to talk with you to discuss your business processes.
Combatting: Purchasing Card: and T&E Expense Fraud. (n.d.). Retrieved from https://www.acl.com/pdfs/eBook_Combat_PCard_and_TE_Expense_Fraud.pdf
Report to the Nations on Occupational Fraud and Abuse - AWS. (n.d.). Retrieved from https://s3-us-west-2.amazonaws.com/acfepublic/2016-report-to-the-nations.pdf