Fraud Examinationon Travel ExpensesMany auditors have stopped auditing travel expenses because of the materiality of the expense. While there is no argument that an individual expense report is not material or that total travel expenses are not material to the company, there are other reasons to audit travel expenses. Primarily, it seems that fraud investigations involving management usually include travel expenses. Consequently, travel expense fraud by management may be an excellent and inexpensive fraud risk assessment procedure. The logic being: if managers are committing travel fraud, then what other frauds are they committing? In addition, many fraud auditors have indicated that frauds start small and grow. To prevent such growth, catching or discouraging an individual from committing travel fraud may act as a fraud deterrent. Lastly, the audit of travel expenses works as an integrity barometer of the organization.

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The Rationale for Travel Expense Fraud

The rationale for travel fraud includes: the intent to cover non-reimbursable expenses, to disguise inappropriate customer entertainment, a sense of entitlement, to conceal individual expenses considered too high for reimbursement, or to receive reimbursement for actual expenses where the original receipt was lost. However, travel reimbursement, customs, practices, and policies vary by company. The acceptability of an expense in one company would be inappropriate in another company. Auditors must understand what is normal and customary under the company’s travel reimbursement practices.

Travel expense abuse consists of submitting an expense that is not consistent with the company’s polices and practices. The abuse is associated with the amount, nature, or frequency of the expense reimbursement. Typically, the employee does not view the reimbursement as inappropriate, but rather the reimbursement policy as too restrictive. The abuse is concealed in the same manner as the travel fraud or by circumventing the approval process.

 

Travel Expense Concealment Strategies

Travel fraud results in the employee obtaining reimbursement for expenses that did not occur, duplicate reimbursement, higher reimbursement than the actual expense, unauthorized expenses and bribes to customers. The fraud is concealed through a falsely stated business purpose, improper expense characterization, or false receipts. The concealment can be categorized in these ways:

  • Travel characterization” is describing the expense in a false manner. For example, entertainment expenses are described as a business meal. Business lunches are submitted as overnight travel expenses. Personal expenses are described as business.
  • No business purpose” is falsely describing the business purpose of the expense or trip. By tax law, travel and entertainment expenses require a business purpose for the expense. The employee provides a false description of the business purpose. For example, when the traveler takes a friend to dinner but describes the expense as a business meeting.
  • Falsification of receipts” is the process of altering a receipt, creating a receipt, or colluding with a vendor to obtain a false receipt.

 

Who Commits Travel Expense Fraud

Auditors should establish criteria for selecting expense reports and use block sampling to focus on a number of reports for a specific traveler during a concentrated period. Using block sampling will allow auditors to spot trends and patterns of abuse. Employees in the following categories should be considered for travel expense account audits:

  • Frequent travelers based on dollars and frequency
  • Executive management
  • Employees on the fast track
  • Employees whose business travel standards are higher than personal travel standards
  • Employees who normally incur entertainment expenses
  • Departments with high direct – bill travel expenses
  • Departments or employees with previously known problems

 

Note: As with most fraud schemes, the auditors need to apply the fraud theory to travel expenses. The red flags are specific to the type of travel expense fraud scheme.

 

The Red Flags of Travel Expense Fraud

During the examination of travel receipts, auditors need to be aware of the red flags of suspicious travel expenses. Auditors should look for these red flags in travel receipts:

  • Dates and times events occur – As to the specific event or in relation to other events, e.g., the airport parking receipt indicates three days of parking expense, but the hotel indicates a five – day stay. Obviously there are viable explanations; however, initially the difference should be treated as a red flag.
  • Location – Auditors must verify that the travel expense occurred in the city associated with the trip or company location.
  • Manual receipts versus credit card receipts – Concerning manual receipts, auditors should note the handwriting style and signs of alteration. Alteration can be noted by looking for multiple blunt point ends and signs of lines having different thicknesses.
  • Method of payment is not consistent with known credit card numbers – Auditors should ensure all credit card numbers on submitted credit card receipts match known employee credit card numbers.
  • Receipts missing informationCredit card receipts typically indicate the name of the restaurant at the top of the receipt. In fraud, the traveler tears off the top portion to disguise the fact that the meal expense was incurred at a local restaurant.
  • Cash – based expenses versus credit card receipts – Cash – based expenses are easier to disguise than credit card receipts. Auditors should note the handwriting style.
  • Consistency in reporting the business purpose or description of the event – Travelers committing travel expense fraud tend to commit the same scheme on several expense reports.
  • Consistency in handwriting – If the handwriting is similar on different receipts from different vendors, then the employee may have created the receipt.

 

Travel Expense Fraud Schemes

Airline Ticket Swapping SchemeThis fraud deals with reimbursement for a higher-price ticket than the actual ticket traveled. Historically, travelers would submit first-class travel ticket receipts, but would actually travel in coach. Then, they would pocket the difference between the first – class ticket price and the coach ticket. However, in today’s world of multiple fare prices, the scheme could occur by submitting for a full – fare coach ticket, but traveling on a highly discounted airline. The red flags are the fare basis on the airline receipt. The higher the fare basis, the more likely the ticket could be part of a ticket swap scheme. Travelers may also purchase tickets with a higher fare basis to take advantage of frequent flyer programs. Remember though, this maybe a customary practice in a company.

Often vendors purchase a ticket for an employee to visit a plant location. In this fraud, the traveler will submit the vendor – purchased ticket for reimbursement. The scheme could also occur when the traveler is traveling for another organization. The red flag is when the method of payment on the airline receipt does not match known methods of payment for the traveler or the lack of normal airline receipts.

 

Direct Bill Arrangement Scheme – In the direct bill fraud, travelers submit a travel receipt with their expense report that is also billed to the company through the accounts payable process. Common areas for this scheme are hotel, car or limousine services, or all – inclusive travel events, when the traveler is on an extended business trip. The travel receipt may reference a purchase order number or some other company account number.

Travelers may also have multiple company credit cards. Procurement cards are a popular tool to eliminate small – dollar purchases from being processed through accounts payable. Travelers may charge the expense to their procurement cards, then submit a duplicate receipt with their expense reports.

 

Multiple Reimbursements Scheme – The multiple reimbursements scheme operates two different ways:

  • The employee is traveling for two different organizations. He or she requests reimbursement from both organizations for the same travel expense.
  • Employees are traveling together, and each one seeks reimbursement for the same expense. Cab fares and meals are a common area for this scheme.

 

Fictitious or Altered Receipts Scheme – Another fraud consists of travelers submitting receipts that have been altered or created to support a specific expense. Some things to watch for on receipts include:

1. Credit Card Receipts

  • Is the restaurant name listed on the receipt?
  • Is the date and time of meal on the receipt?
  • Is the date and time of the receipt consistent with the characterization of the meal?
  • Is the credit card number consistent with known credit card numbers of the traveler?
  • Is the approval code on the receipt? False credit card receipts are often not credit checked.
  • Is the meal amount consistent with the price range of meals at the restaurant?
  • Is the receipt missing logical information?
  • Is the receipt altered or changed as to date or amount?
  • Is the receipt arithmetically correct? Intentional errors in totaling the receipt can result in credits on the traveler’s credit card statement.

 

2. Manual Restaurant Receipts

  • Is the restaurant name listed on the receipt?
  • Is the receipt number in sequence with other receipts?
  • Does the traveler normally charge or pay cash for meal expenses?
  • Is the meal amount consistent with a cash – only restaurant or cash payment for a meal?
  • Is the traveler traveling with other employees or vendors?
  • Is the receipt missing logical information?
  • Is the receipt altered or changed as to date or amount?
  • Is the handwriting similar to that of the traveler?
  • Is there consistency of ink on the various receipts?

 

Schemes Involving Disguised Local Expenses or Disguised Personal – Trips Disguised local expenses are concealed by removing or altering the name of the restaurant, and the date and time of the event, on the receipt. The receipt is submitted as a travel expense, when in fact the expense was not incurred in travel status. Disguised personal trips are hidden by falsely representing the nature of the trip. Typically, the length of the stay is not consistent with the stated business purpose. There is a difference between structuring a personal trip around a valid business trip and a business trip created for personal reasons.

A red flag is triggered when the length of the stay is not consistent with the business trip, expenses are not included in the expense reimbursement, or knowledge of the traveler’s personal life.

 

Supervisor Swap SchemeIn this scheme, the supervisor requires a subordinate to incur an expense that the supervisor knows the employer would not approve. The expense is for an amount higher than normally allowable, or not allowable due to the nature of the expense or the business location.

The red flags are a higher-ranked employee in attendance or amounts or nature of the expense not typical for the traveler.

 

Internal Entertaining SchemeThe internal entertaining scheme is the process of characterizing an expense as a necessary or allowable one. Typically, the business purpose stated on the expense report is false. The pattern or frequency of the business meal or trip is the red flag to the abuse.

 

Cash Conversion Scheme – In the cash conversion scheme, the traveler obtains cash or a vendor gift receipt and submits a credit card receipt from the vendor supporting the expense. The expenditure would be represented as a meal expense or entertainment expense. Many restaurants now have shops at their location. The traveler purchases clothes, and then seeks reimbursement as a meal expense. A red flag would be an even amount on the credit card receipt or frequency of going to the same restaurant.

The cash conversion scheme does not typically occur at chain restaurants. Unfortunately, there is no obvious red flag of the event. Some organizations now require a detailed receipt to be submitted with every credit card receipt. Auditors should understand if a restaurant owner is willing to provide cash to the traveler, they would most likely provide a false meal receipt as well.

 

Night Club Entertainment SchemeThe names of many gentlemen’s clubs sound like restaurants. The vendor code is a restaurant code rather than a nightclub. In these schemes, the traveler visits the club and submits the reimbursement as a meal expense. Unless auditors recognize the names of the clubs, there is no obvious red flag of the event.

In a recent case, the Wall Street Journal reported on an executive who entertained customers at a gentlemen’s club. The event caused adverse publicity for the company. Adverse publicity can be a greater risk than the loss of assets.

 

Rental Car Receipt SchemeIn this scheme, the traveler rents an automobile for sightseeing rather than for business. The red flag is that the miles driven are not consistent with the intended business purpose. In addition, the gas reimbursement is not consistent with the miles driven.

 

Taxicab Receipt Scheme – This scheme occurs because cab drivers may provide several blank receipts to the traveler. Therefore; auditors should be alert to the reasonableness of the amount, and whether a second traveler also submitted a receipt for the same expenditure.