How to minimize expense fraud in your organization
Understand expense fraud, including expense reimbursement and employee expense fraud. Discover strategies for expense report fraud detection.
You put your trust in employees as soon as you take them on.
And of course, most aim to prove their dedication from day one.
However, let’s be realistic: not every transaction is traceable.
It might take time to spot a minor cash difference, and you never know who might exploit that weakness to commit expense fraud.
From inflated receipts to outright fictitious claims, there are many ways unscrupulous employees could skim a few dollars from your expense account.
A good understanding of the most common types of expense fraud will help you to stay vigilant and keep on top of any cash leakage.
This guide explains what expense fraud is and outlines some best practices to help you implement effective prevention and detection strategies.
Here’s what we’ll cover:
What is expenses fraud?
According to the Association of Certified Fraud Examiners (ACFE), expense fraud is any kind of “scheme in which an employee claims reimbursement for fictitious or inflated business expenses.”
In other words, it’s when employees knowingly submit false spending claims or exaggerate the amount spent.
Expense fraud—also known as reimbursement fraud—often involves relatively small sums, but if done repeatedly, or spread across a large number of employees, the accumulated amount can have a big impact on your bottom line.
This type of fraud is more likely to happen if your employees can see vulnerabilities in your expense management procedures.
Any such loopholes are exposed when your system lacks oversight measures, such as appropriate and regular reviews of your company’s expense reports.
The ACFE has cited cases in which individuals exploited systemic flaws at major companies and multinationals, with the fraud going undetected for years.
In extreme cases the cost can run to hundreds of millions of dollars.
Common types of employee expense fraud
Fairly innocuous acts—such as making personal photocopies on company equipment—are enough to put pressure on a company’s financial health. So, imagine the cumulative effect of direct cash thefts.
Let’s look at some of the most common reimbursement fraud methods directly involving cash:
Fictitious expenses
Employees submitting fake receipts for items they never bought.
They might have access to software that can create these receipts, or they could get blank receipts and fill them out.
For example, AI-based image generating tools are freely available today and can create realistic-looking receipts.
Mischaracterized expenses
Claiming personal expenses as job-related costs.
For example, an employee might claim a dinner with friends as a client meeting.
Alternatively, employees may misrepresent the nature of items bought, hiding out-of-policy items like alcohol, for example.
Inflated expenses
Exaggerating the cost of expenses that were genuinely incurred—an employee might physically alter or forge the total on a valid receipt.
For example, on a hand-written receipt they could easily change $10 to $100.
Duplicate submissions
Claiming the same expense more than once.
For example, an employee might simultaneously submit a paper receipt and a digital entry for the same purchase.
Collusion with vendors
An employee might know someone at your supplier who can issue false receipts or exaggerate the price.
The contact may be willing to do this if they get a share of the fraudulent payment.
Abusing flexible rules
Attempts to claim expenses without receipts are typically denied outright.
However, you or your finance manager may occasionally accept claims if the employee has a convincing argument—after all, that could be good for employee relations.
But bear in mind that frequently approving claims without proper receipts could become a gateway to fraud.
How to detect expense fraud
Cheating employees are betting you won’t notice that your expense account is inflated.
However, there are fraud detection strategies you can employ to stay one step ahead.
Regular audits
Conduct periodic reviews of expense reports to identify anomalies.
Start by checking that each expense is accompanied by a receipt, and cross-reference expense reports with travel schedules or meeting logs.
This confirms that there was good reason for the expense on the day in question.
Then verify the legitimacy of supporting documents by contacting vendors directly.
Common warning signs of expense report fraud are:
- Rounded figures. Frequent use of neat, rounded numbers may indicate inflated or fabricated costs.
- Expenses regularly bordering approval limit. A lack of natural variation in spending could be a sign of human intervention.
- Entries with vague descriptions. Entries such as “business lunch” lack the details needed for proper verification.
Automated detection tools
Most expense management software includes fraud detection capabilities that can flag suspicious activities.
This takes the tedium out of searching for obvious anomalies such as duplicate claims, out-of-policy expenses, mismatched vendor names, or claims submitted outside of normal business hours.
Optical Character Recognition (OCR) tools can convert scanned or photographed receipts into searchable text, ready for analysis by the software.
When combined with machine learning and rule-based filters, the system can detect altered data, unusual claim frequencies, or vendor inconsistencies.
Advanced analytics can also reveal more subtle patterns, such as employees with consistently high claims or who repeatedly give preference to certain vendors.
Even if fraud isn’t confirmed, these insights can highlight areas that deserve a closer look.
Strategies for preventing expense reimbursement fraud
You can take some comfort in knowing there are ways to detect fraud.
But it’s far better—and more cost-efficient—to prevent it in the first place.
Here are some proactive measures that can significantly reduce the risk of expense fraud:
Clear expense policies
Establish comprehensive guidelines outlining acceptable expenses and documentation requirements.
Be specific about receipt submission rules, spending limits and categories of reimbursable expenses.
Approval workflows
Implement a system of checks and balances for oversight, such as multi-level approval processes.
For example, require a manager’s approval for all expense reports.
For larger amounts, insist on a senior manager’s review. Ensure all approvals are documented and traceable.
Control of corporate cards
Build spending limits into the company credit cards you issue to employees.
Also, implement real-time monitoring capabilities that regularly review transactions for unusual activity.
Consider setting restrictions on certain types of purchases, such as entertainment or cash withdrawals.
Don’t forget to cancel the cards of departing employees.
Employee training
Educate staff on your expense policies and the potential consequences of fraud, such as disciplinary action, job loss, and even legal action.
Include training in ethical behavior as a part of your onboarding and employees’ ongoing professional development.
What to do if you detect expense fraud
If you suspect or uncover employee expense fraud within your organization, take the following steps:
1. Gather evidence
Collect all relevant documentation, including receipts, expense reports, and communication records.
Create copies of all evidence and keep them secure.
2. Conduct an internal investigation
Involve HR and legal teams to assess the situation in a professional manner.
The goal is to determine the extent of the fraud and who is responsible.
3. Confront the employee
Approach the individual professionally and present the evidence.
Allow them to explain whether there is a non-malicious reason for the anomalies.
4. Take disciplinary action
If you’re satisfied that the anomalies were intentional, refer to company policy to decide on the appropriate disciplinary measures.
These should reflect the severity of the fraud, indicating whether it warrants a formal warning, suspension, or termination of employment.
Your response should follow legal guidelines.
5. Review and strengthen policies
Analyze how the fraud occurred so you can update policies and controls to prevent future incidents.
For example, you might implement stricter approval limits or require more detailed documentation for certain expense types.
Final thoughts
Expense fraud often starts small, but its financial and cultural impact can quickly grow if left unchecked.
From mischaracterization of trivial items in expense claims to sophisticated schemes and hacks, the risk is real—and so is the cost.
Fortunately, you can take meaningful steps to reduce this risk through appropriate policies, regular oversight, and the use of smart accounting technology.
These and other measures help you foster a culture of transparency and accountability, allowing you to detect and prevent fraud while building a healthier, more resilient business.
