A few good men expense report

Class,

Let's put expense reporting fraud in perspective with the Fraud Scale and the Fraud Triangle. What factors from an opportunity standpoint have to be in place?

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whom he allegedly entertained. The fraudster usually paid all his expenses in cash to

prevent an audit trail. One thing that undid this culprit was the fact that the last digit on

most of the prices on his receipt was usually a zero or a five. This fact, noted by an astute

employee, raised questions about the validity of his expenses.

A similar scheme was found in Case 1980, in which an employee’s girlfriend worked at a

restaurant near the victim company. This girlfriend validated credit card receipts and gave

them to the fraudster so that he could submit them with his expense reports.

Instead of asking for blank receipts, some employees simply steal them. In some cases a

fraudster will steal an entire stack of blank receipts and submit them over time to verify

fictitious business expenses. This type of fraud should be identifiable by the fact that the

perpetrator is submitting consecutively numbered receipts from the same establishment

even though his expense reports are spread out over time.

Claiming the Expenses of Others

Another way that fraudsters use actual receipts to generate unwarranted reimbursements is

by submitting expense reports for expenses that were paid by others. For instance, in Case

2619 an employee claimed hotel expenses that had actually been paid by his client.

Photocopies of legitimate hotel bills were attached to the expense report as though the

employee had paid for his own room.

As we have stated, not all companies require receipts to be attached to expense reports.

Checks written by the employee or copies of his personal credit card bill might be allowed

as support in lieu of a receipt. In Case 2075 a person wrote personal checks that appeared to

be for business expenses, then photocopied these checks and attached them to

reimbursement requests. In actuality, nothing was purchased with the checks; they were

destroyed after the copies were made. This enabled the fraudster to receive a

reimbursement from his employer without ever actually incurring a business expense. The

same method can be used with credit cards, when a copy of a statement is used to support a

purchase. Once the expense report is filed, the fraudster returns the item and receives a

credit to his account.

In many expense reimbursement schemes the perpetrator is not required to submit any

support at all. This makes it much easier to create the appearance of an expense that does

not actually exist.

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Preventing and Detecting Fictitious Expense Reimbursement Schemes

A number of red flags may indicate an employee is seeking reimbursement for fictitious

travel and entertainment expenses. One of the most common is the employee who claims

items—particularly high-dollar items—were paid for in cash. This enables him to explain

why there is no audit trail for the expense (i.e., why the item did not show up on his

company credit card statement). Organizations should be alert for patterns in which an

employee uses credit cards for low-dollar expenses but pays cash for high-dollar expenses.

Other common red flags include the following:

• Expenses that are consistently rounded off, ending with a “0” or a “5,” which tends to

indicate that the employee is fabricating the numbers

• Patterns in which expenses are consistently for the same amount (e.g., a salesperson’s

business dinners always cost $120)

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• Reimbursement requests from an employee that consistently fall at or just below the

organization’s reimbursement limit

• Receipts from a restaurant that are submitted over an extended period of time, yet are

consecutively numbered; this tends to indicate that the employee has obtained a stack

of blank receipts and is using them to support fictitious expenses

• Receipts or other support that do not look professional or lack information about the

vendor such as phone numbers, physical addresses, or logos

Multiple Reimbursement Schemes

The least common of the expense reimbursement schemes as revealed in the ACFE’s

research is the multiple reimbursement. This type of fraud involves the submission of a

single expense several times to receive multiple reimbursements. The most frequent

example of a duplicate reimbursement scheme is the submission of several types of support

for the same expense. An example arose in Case 89, in which an employee used, for

example, an airline ticket receipt and a travel agency invoice on separate expense reports so

that he could be reimbursed twice for the cost of a single flight. The fraudster had his

division president authorize one report and the vice president authorize the other so that

neither saw both reports. In addition, the perpetrator allowed a time lag of about a month

between the filing of the two reports, so that the duplication would be less noticeable.

In cases in which a company does not require original documents as support, some

employees even use several copies of the same support document to generate multiple

reimbursements.

Rather than file two expense reports, employees may charge an item to the company credit

card, save the receipt, and attach it to an expense report as if they paid for the item

themselves. The victim company therefore ends up paying twice for the same expense.

Perhaps the most interesting case of duplicated expenses in our studies involved a

government official who had responsibilities over two distinct budgets. The perpetrator of

Case 83 took business trips and made expense claims to the travel funds of each of his

budgets, thereby receiving a double reimbursement. In some cases the culprit charged the

expenses to another budget category and still submitted reports through both budgets,

generating a triple reimbursement. Eventually this person began to fabricate trips when he

was not even leaving town, which led to the detection of his scheme.

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Preventing and Detecting Multiple Reimbursement Schemes

Organizations should enforce a policy against accepting photocopies as support for business

expenses. This practice will help prevent schemes whereby copies of the same receipt are

submitted several times. If photocopies are submitted, verify the expense and check it

against previous requests before issuing a reimbursement. An organization’s accounting

system should be set up to flag duplicate payment amounts that are coded as travel and

entertainment expense.

It is also important to clearly establish what types of support will be accepted with an

expense report. For instance, some fraudsters use a restaurant receipt to claim

reimbursement for a business dinner, then use their credit card statement to claim

reimbursement for the meal a second time. If the organization accepts only original

receipts, this scheme will not succeed.

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Expense reports that are approved by supervisors outside the requestor’s department

should be carefully scrutinized, and in general organizations should require that expense

reports be reviewed and approved by a direct supervisor. Employees may take an expense

report to a manager from another department because they know that manager will not be

familiar enough with their work schedule to spot an inconsistency on the report, or they

may try to have two managers approve the same report as part of a multiple

reimbursement scheme.

Some employees obtain reimbursement for a business expense, maintain a copy of the

receipt, and resubmit the expense after a few weeks. Organizations should establish a policy

whereby expenses must be submitted within a certain time frame. Any expenses more than

60 days old, for example, would be denied.

CASE STUDY: THE EXTRAVAGANT SALESMAN

Dan Greenfield is a CFE who has been investigating fraud for over 15 years, and in that

time he’s developed a feel for when somebody is being dishonest with him. It’s not always

the same thing: some people are too defensive, some too nervous, some too angry. And then

there are people like Cy Chesterly, who are just too helpful. The first time Dan Greenfield

met Cy Chesterly, he quickly got the feeling that Chesterly was trying to put something over

on him: “He was just way too friendly, shaking hands, slapping my back. His whole

approach was very slick. I definitely got the feeling he was trying to ‘sell’ me.”

And selling is what Cy Chesterly did best. Chesterly was the vice president in charge of sales

for Stemson, Inc., one of the largest machine parts manufacturers in the upper Midwest.

Greenfield, who specializes in internal investigations, had been called in by the company’s

new president to look into some disturbing numbers in the company’s travel and

entertainment expenses. The initial clues pointed to Chesterly as the most likely

perpetrator. “You never go into a case trying to pin a fraud on somebody, but you usually

start out with a theory of the most reasonable explanation for the losses,” says Greenfield.

And in this case, the evidence Greenfield had already pointed to Chesterly. “Then when you

meet the guy and he’s way too eager, much more than a normal person would be, that is a

clue that you’re on the right track.”

Chesterly had been with Stemson, Inc., for over ten years, and in that time he’d helped

build it into one of the most successful companies in its sector. Chesterly had the gift of the

salesman; he could glad-hand and schmooze with the best of them. He had a familiar good

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ol’ boy charm (he was originally from Texas) that drew people in. He knew every customer

by name, and he knew their family members’ names, too. Everyone he did business with

was “Hoss” or “Buddy,” or “Sweetie” if she was a woman. It may not have been politically

correct, but it won him customers, and it built Stemson, Inc.’s business. The company’s

founder, Charlie Stemson, considered Chesterly his top employee; he even promoted him

from sales manager to vice president. Chesterly was the face of the company to all its

biggest clients. He was a star.

The biggest weapon in Chesterly’s sales arsenal was the company expense account. He

wined and dined customers and prospects: steak dinners, golf outings, bars, strip clubs,

fishing trips, expensive birthday presents, gifts for their kids, anything it took to ingratiate

himself. “He built relationships with his customers, which is what a good salesman does,”

says Greenfield. “And he was a heck of a salesman. These people loved him. We

interviewed a few customers in the course of the investigation, and they all said what a

great guy he was. You send somebody’s kid a birthday present, they’re going to respond to

that. It was a great touch.”

Charlie Stemson, the company owner, knew that Chesterly was running up big expenses

with his customers, and he encouraged it. The returns more than justified the investment.

Chesterly kept bringing in more and more business, and over time everybody just kind of

stopped paying attention to his expense account. “There were no controls on his expenses

whatsoever, as far as we could tell,” says Greenfield.

All of that might have gone on indefinitely, if not for a bad turn of luck: Charlie Stemson

had a heart attack. He survived, but after that Stemson began looking to retire and bring

someone else in to run the business. When Stemson finally found a replacement, his choice

was a little shocking. Into this informally run machine parts manufacturing company

stepped the new president, Stuart Rusk.

Rusk was a CPA and an MBA, a man who had worked for years in upper management for a

major Midwestern wholesaler. He was straight business school, button-down shirt,

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blue blazer, the works. He was the last person on earth who would seem to fit in at

Stemson, Inc., where men like Cy Chesterly and Charlie Stemson wore jeans to work and

didn’t even have college degrees.

“What happened is, the company had outgrown itself,” says Greenfield. “They started as a

sort of mom and pop operation; they didn’t have any formal business plan or structure, no

controls, nothing like that. When they got big, that system didn’t work for the business

anymore.” Stemson may have been retiring, but he wanted to make sure his company

continued to grow. “He decided that they were going to have to start acting like a big-time

business if they wanted to keep growing,” Greenfield says. “That’s why he brought in Rusk.”

As Charlie Stemson said, they already knew the manufacturing end of the business. They

needed somebody who knew the business end of the business.

Rusk did not personally know Stemson, but he knew a friend of Stemson’s, and that friend

provided the connection. They met for an interview at which Rusk gave Stemson a detailed

plan for the company’s future; how to maximize profits, reach new markets, cut costs, the

works. Stemson was sold. Within a few weeks Rusk took over Stemson, Inc.

“One of the first things he did was look at the books,” says Greenfield, “and when he did,

the travel and entertainment expense just jumped off the page at him. It was ridiculous.”

Chesterly had apparently started using his expense account for more than just entertaining

customers. Entertainment expenses had been rising much faster than sales, and they were

way higher than anyone could think was reasonable. Just looking at a few of the most

recent company credit card statements, Rusk immediately knew he had a problem. “There

was lawn furniture on one statement. Another one had a Ping Pong table,” says Greenfield.

“He didn’t even try to hide it. He just charged the stuff to the company credit card. Nobody

ever looked at it. They just sent in the check.”

Rusk immediately decided to call in a fraud expert to sort everything out. That’s where

Greenfield entered the picture. His firm was brought in to determine how big a problem

there was, and who was behind it. “Of course, everything immediately pointed to

Chesterly,” says Greenfield. “He was the guy making most of the sales trips, dealing with

most of the customers. Plus you had the charges they’d already found on the credit card.”

But proving what was going on turned out to be somewhat difficult. “There was no support

of any kind on any of Chesterly’s expense reports,” says Greenfield. “We went back four or

five years and probably didn’t find ten receipts. The items on the credit cards you could

track down, but he had trips, meals, car rentals, you name it, that he’d supposedly paid for

in cash or charged to his own credit card. He got reimbursed for all of it.” Some of the items

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on Chesterly’s expense reports weren’t even what he said they were. For instance, on one

report he claimed $600 for an airline ticket, paid for by check; it turned out to be a

motorcycle he’d bought for his son.

Gradually, Greenfield and his associates began to sort through all the financial mess. When

they did, the information was shocking. “He’d been abusing the system at just an amazing

rate,” says Greenfield. “Over the preceding four years, we found about $50,000 in expenses

that were definitely fraudulent, and probably twice that much in stuff we suspected but

couldn’t prove.” Chesterly was using the company’s money to bolster his lifestyle.

“Vacations, restaurants, furniture, jewelry for his wife, you name it,” says Greenfield. They

even found that he had charged professional escort services to the company credit card.

“We don’t know if that was for him or for his customers. We don’t really want to know. It’s

fraud either way.”

The investigation of Chesterly’s expense account abuse eventually turned up other frauds

as well. He was cutting special deals to his customers and getting kickbacks in return. “He

had an enormous amount of latitude to negotiate prices, expend funds, whatever,” says

Greenfield. “There was very little oversight. He took advantage of it.”

Eventually, Greenfield and an associate interviewed Chesterly about the fraud. By that time,

they had enough documentation to prove he’d done it. But he never confessed. “He came

into the room, told us what a good job we were doing, called me ‘Hoss,’ the whole bit,” says

Greenfield. “He kept going on about how much he wanted to help us. But he never said a

thing. We caught him lying, we caught him contradicting himself, we showed him proof on

some of the frauds. Most people, if you do that they’ll confess because they know they’re

caught.” But not Chesterly. “It didn’t even faze him. He was probably the slipperiest guy I’ve

ever interviewed. He’d just keep lying, even when it didn’t make sense.” Of course, the fact

that Chesterly never confessed didn’t mean that the interview was wasted. “When you get

somebody who absolutely won’t confess, you can at least still document that they’re being

contradictory,” says Greenfield. “You document the lies and then later you use that in your

case.”

In the end, Greenfield documented over $200,000 in losses caused by Chesterly, “and that

was just when we stopped counting. I’m sure there was more. But at that point we had

enough to go to management.” Chesterly was fired but the company never prosecuted.

Greenfield thinks the reason is because of the change in management and the fact that

some of the company’s customers might have been involved in Chesterly’s schemes. “They

had an unstable situation at the time and I think they just didn’t want to rock the boat any

further. Obviously, I don’t think it was the right decision. But those things are the client’s

call; all we can do is give them the information.”

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Several names and details have been changed to preserve anonymity.2

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PROACTIVE COMPUTER AUDIT TESTS FOR DETECTING EXPENSE REIMBURSEMENT SCHEMES

Title Category Description Data file(s)

Age employee payments by check date.

All Focuses audit efforts on periods of increased activity.

• Invoice payment

Stratify by expense payment amount.

All Focuses audit efforts on high invoice payments.

• Invoice payment

Extract multiple charges of the same product type (using SIC code) below a predefined credit card expense limit.

All Charges below an approval limit may be an attempt to circumvent a management review.

• Procurement card

Summarize credit card use by employee and sort from high to low.

All High usage of credit cards by certain employees may be a sign of abuse.

• Procurement card

Extract all round-dollar payments.

All Round-dollar payments have a higher likelihood of being fraudulent.

• Invoice payment

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Title Category Description Data file(s)

Extract payments to employees for expenses that were incurred during periods when the employee was on vacation.

Mischaracterized expenses

Expenses for business are rarely charged when the employee is also on vacation.

• Invoice payment

• Procurement card

Extract SIC codes from credit card payments normally associated with personal purchases.

Mischaracterized expenses

Personal purchases with company cards may be a sign of abuse.

• Procurement card

Sequence possible duplicate expenses based on the absolute value of the amount and receipt date.

Multiple reimbursements

Lists possible duplicate invoices that may be used to inflate sales and associated commissions.

• Invoice payment

SUMMARY

Expense reimbursement schemes occur when employees make false claims for

reimbursement of fictitious or inflated business expenses. There are four principal methods

by which fraudsters attempt to generate fraudulent reimbursements from their employers.

The first is to mischaracterize personal expenses—such as airfare or hotel costs—as

business-related expenses. The second method is to overstate the cost of actual business

expenses by altering receipts or by purchasing more than is necessary for business

purposes. Employees can also seek reimbursement for fictitious expenses that were never

incurred. Finally, employees may attempt to obtain multiple reimbursements for the same

expense.

ESSENTIAL TERMS

Mischaracterized expense scheme

An attempt to obtain reimbursement for personal expenses by claiming that they are

business-related expenses.

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Overstated expense reimbursements

Schemes in which business-related expenses are inflated on an expense report

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7-2

7-3

7-4

7-5

7-6

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so that the perpetrator is reimbursed for an amount greater than the actual expense.

Overpurchasing

A method of overstating business expenses whereby a fraudster buys two or more

business expense items (such as airline tickets) at different prices. The perpetrator

returns the more expensive item for a refund, but claims reimbursement for this item.

As a result, he is reimbursed for more than his actual expenses.

Fictitious expense reimbursement schemes

A scheme in which an employee seeks reimbursement for wholly nonexistent items or

expenses.

Multiple reimbursement schemes

A scheme in which an employee seeks to obtain reimbursement more than once for a

single business-related expense.

REVIEW QUESTIONS

(Learning objective 7-1) Explain what constitutes expense reimbursement fraud, and

list the four categories of expense reimbursement schemes.

(Learning objective 7-3) Alpha is a salesperson for ABC Company. In July, Alpha flies to

Miami for two weeks of vacation. Instead of buying a coach class ticket, he flies business

class, which is more expensive. A few weeks later, Alpha prepares an expense report

and includes the Miami flight on it. He lists the reason for the flight as “customer

development.” What category of expense reimbursement fraud has Alpha committed?

(Learning objective 7-5) Why is it important to require original receipts as support for

expenses listed on a travel and entertainment expense report?

(Learning objective 7-5) What is meant by the term overpurchasing?

(Learning objective 7-7) Provide two examples of how an employee can commit a

fictitious expense reimbursement scheme.

(Learning objective 7-9) How is a multiple reimbursement scheme committed?

(Learning objective 7-5) Beta is an auditor for ABC Company. He runs a report that

extracts payments to employees for business expenses incurred on dates that do not

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coincide with scheduled business trips or that were incurred while the employee was

on leave time. What category or categories of expense reimbursement scheme would

this report most likely identify?

DISCUSSION ISSUES

(Learning objective 7-4) What internal controls can be put into place to prevent an

employee from committing a mischaracterized expense scheme?

(Learning objectives 7-4, 7-6, and 7-8) In the case study “Frequent Flier’s Fraud Crashes,”

what internal controls could have detected the fraud earlier?

(Learning objectives 7-4, 7-6, 7-8, and 7-10) Discuss how establishing travel and

entertainment budgets can help an organization detect expense reimbursement fraud.

(Learning objectives 7-5 and 7-6) ABC Company has three in-house salespeople (Red,

White, and Blue) who all make frequent trips to Santa Fe, New Mexico, where one of the

company’s largest customers is based. A manager at ABC has noticed that the average

airfare expense claimed by Red for these trips is $755 round trip. The average airfare

expense claimed by White is $778. The average airfare expense claimed by Blue is

$1,159. What type of expense reimbursement fraud might this indicate, and what

controls would you recommend to the company to prevent this kind of scheme?

(Learning objectives 7-7 and 7-8) Baker is an auditor for ABC Company. He is reviewing

the expense reports that Green, a salesperson, has submitted over the last 12 months.

Baker notices that Green’s expenses for “customer development dinners” consistently

range between $160 and $170, and the amounts are almost always a round number.

ABC Company has a policy that limits reimbursement for business dinners to $175

unless otherwise authorized. In addition, most of the expense reports show that Green

paid for the meals in cash, even though he has been issued a company credit card that

he usually uses for other travel and entertainment expenses. What kind of expense

reimbursement scheme is Green most likely perpetrating, based on these

circumstances?

(Learning objective 7-10) What internal controls would help prevent an employee from

claiming an expense more than once?