What is Occupational Fraud?
Occupational fraud is fraud committed by an employee on an employer in the course of their employment. They are more common and cause more financial loss to businesses than frauds committed by third parties. As employees will continue to work at the business, they will generally try to hide these frauds permanently, meaning that occupational fraud can be committed over an extended period of time.
What are false claim frauds?
These are frauds committed by dishonest employees that are aimed at attacking the payroll and expense reimbursement system of a business. They fall into two main areas:
1. false claims for expenses, and
2. false claims for wages.
False expense claims arise when employees who are entitled to be reimbursed for expenses incurred while performing their work duties, claim expenses to which they are not entitled. There are various ways that they may do this and the major methods are detailed in the first part of this paper.
False wages claims arise when employees who are paid on an hourly rate or remunerated on some basis other than a salary, manipulate the system to falsely increase their remuneration.
False Expense Claims Fraud
False Pay Claims Fraud
Lessons to be Learned
Prevention and Detection
False Expense Claims Fraud
Expense claim frauds are usually smaller than other occupational frauds as the amount of the expenses that may be reimbursed to employees are generally small – but they may be common and occur over long periods. Claims for reimbursements may be approved by someone who has no knowledge of what amount the expenses should be, or whether the expense was incurred at all. The role of approving these claims may only be a minor one for that person and they may not give the task due consideration.
Usually there is no need to hide the false claims once they have been paid. Like billing schemes, the conduct of the fraud itself makes the transaction look like a legitimate business expense. In effect, the fraud is hidden in plain sight in the records of the business. The fact that the employee does not need to hide the theft of the money makes it more appealing to do than simply stealing money, where the employee usually must hide it.
Lack of controls
Some businesses have no claim approval process at all. Expenses under a certain amount may be paid without any verification. This is usually done for expedience and cost saving on the basis that the claims are small and not worth examining. But the amount of an ongoing loss may grow to be significant over time.
Most businesses that do not have regular expense claims made by employees have very few procedures to control reimbursements. Some will perceive it as a waste of resources. Only businesses with employees making regular claims for significant amounts may have proper (any) controls and these are usually for record keeping purposes. Placing strong controls over expense reimbursement is not seen as commercial in most small businesses.
Added to that attitude, controls that are in place may be ignored when the expense is charged to a client. This is justified on the basis that the cost is not borne by the business and any improper increase will not cause a loss. This attitude will lead to the business not caring whether fraud is committed as they are not the ultimate victim.
Most controls that are put in place are nothing more than providing a receipt to the appropriate clerk and possibly completing a short reimbursement request form. Further checks may not be made, unless the expense is particularly significant in size or very out of the ordinary.
Generally the more senior the employee making the reimbursement claim, the less likely that the claim will be questioned. If that senior employee has access to the reimbursement process and can manipulate the records, a fraud will be difficult to locate, even if anyone decided to check the claims.
How is the fraud done?
These frauds are usually committed when a number of employees are making expense claims on a regular basis, or when the dishonest employee is making regular legitimate claims. The business will be expecting claims and the volume would help to hide any false claims.
There are four variances of false expense schemes. These are:
1. Mischaracterized Expense Claims
2. Inflated Expense Claims
3. False Expense Claims
4. Multiple Expense Claims
1. Mischaracterized expenses claims
In this fraud, the employee claims non-business expenses as business expenses. Common expenses claimed are private meal costs classified as business meals with clients, private travel expenses, and other entertainment expenses classified as business expenses.
Some employees will incur the expense of a type and at a time when it is possible for them to be conducting business. Attempting to claim Sunday morning brunch as a business meal may be difficult to explain. A Friday lunch will be more plausible. The employee simply makes the claim with the explanation that it was incurred for a business purpose.
2. Inflated expense claims
Inflating expenses can be done by:
(i) altering receipts or other documentation;
(ii) over-purchasing: or
(iii) overstating the amount other people’s claims.
Altering receipts or documentation is making changes to the original document evidencing the expense. Alternately, a new receipt can be generated replacing the original, but for a greater amount. There is nothing sophisticated about this type of fraud. The forged invoice is simply submitted for approval. This fraud is easiest if the person committing the fraud handles the reimbursement process or provides the approvals. They approve their own forged documents.
Over-purchasing is purchasing too much of what is required or a more expensive item in the first instance and obtaining a receipt for that larger amount. The employee then returns some of the or the more expensive item, and obtains a refund. If needed, a less expensive version is purchased to replace the more expensive one. A claim is made for the greater amount, and the difference between the smaller actual amount purchased and the larger amount of the reimbursement is the gain to the fraudster.
Mr P traveled constantly as part of his employment. That travel was usually by aircraft and, as the expense was usually charged to clients, he usually traveled business class. As he traveled so much, he would submit a number of tickets and hotel receipts for reimbursement at one time.
For each trip he would order a full price business class ticket to the destination. He would also order an economy ticket as cheaply as possible to the destination. As he ordered and paid for both tickets himself, the business should never find out that he had bought two tickets for the same trip. He would cancel the business class ticket and obtain a full refund (a credit off his credit card). But as he had already bought it and paid for it, he had the original receipt issued for the purchase of the full price.
He would submit the receipt for the business class ticket (to a legitimate destination for a known business trip) and obtain a reimbursement for that amount. Even taking into account that he had to pay the economy class ticket himself, he still made a profit.
Fraud Case – Occupational Fraud and Abuse. Wells, Joseph T
Inflating other employee’s expense claims is usually done by the person processing reimbursement claims and without the knowledge of the other employee. That person increases the legitimate expense claim of another employee, draws the payment at the higher amount, pays the employee the proper lower amount and then keeps the difference.
3. False Expenses claims
These are purely fictitious expense claims invented to obtain a reimbursement when there has been no expenditure, work related or not. The common ways to commit this fraud are:
(i) generating false documentation; and
(ii) filling out blank receipts;
Generating false but professional looking documentation can be done with any personal computer or photocopier. False documents are submitted as genuine claims. One form of this fraud is for the perpetrator to write personal cheques for what looked like business expenses, attach photocopies of these cheques to the false documentation to make it look like they have paid the expense, and request reimbursement. The cheques were never used, the purchase was never made, but the reimbursement is paid.
Blank receipts can be obtained or stolen from vendors and service providers. The easiest blank receipts to obtain are from taxi as they are hand written on the back of their business cards. There is no difficulty in obtaining a number of these blank receipts without suspicion. Some businesses still use off-the-shelf invoice books. These can be purchased by anyone at any news agency. False claims can be made in the perpetrator’s name or, if the perpetrator has the required access, in the name of another employee.
4. Multiple claims
This scheme involves submitting one claim (legitimate or otherwise) several times for reimbursement. A common form of the fraud is obtaining several documents that evidence the same expense, and lodging these documents with separate reimbursement claims. This is easier if the fraudster can get different people to authorize the separate claims. The same claim being placed before the same person, even weeks apart, has the risk of being noticed.
How do you prevent these frauds?
The best prevention technique will be a system of controls requiring detailed reimbursement requests, original receipts, supporting documentation and reasons for that expenditure is necessary. This verifies the legitimacy of the claims and limits the chances that a second claim for the expense will be made at a later date. Claims should also be made within a specified time period.
Supervisors should approve reimbursement claims for employee under their supervision. An independent eye close the employee cast over a claim may highlight suspicious claims – if the independent eye actually does a proper review of the claim. Some larger claims may be able to be verified directly with the supplier.
There should be a separation of duties between the person authorizing the claims and the person paying the claims to stop employees processing their own false claims. Each employee should be given a list of the claims that have been made in their name on a regular basis. This should uncover false claims made in their name and the person who approved it. This should stop employees making claims in other people’s names.
False Pay Claims Frauds
This fraud manipulates the payroll system in general and the factors used to calculate remuneration in particular. This happens more often when employees are not paid on a set wage or salary, but when their pay is calculated on some variable, whether hours, units produced, can charge for overtime hours etc. Some employees may falsely increase their pay by by manipulating that variable.
Exactly how this fraud is done will depend on the payroll system in place in the business, how employees record their hours, how much discretion that have in varying their work time, and the controls that are or are not in place.
Usually there is no need to hide the false claims once they have been processed. The fraud is hidden in the normal pay process by the simple act of making the payment and recording it as a payroll expense. The fact that the employee does not need to hide the fraud makes it appealing to some people.
The most common forms of this fraud are:
1. Falsifying time sheets
Manual or electronic time sheets are used in some businesses where remuneration is based on an hourly rate. Depending upon the system, falsifying these records may be as easy as writing down the wrong start and finish time, extending the hours worked.
This information may be difficult to verify when employees start and finish shifts at different times, and employees have discretion on working overtime hours. It may be impossible to show that any particular employee was or was not working just before at any particular time, especially some days or weeks after the event.
2. Clocking on and off at different times
Some employers use mechanical or electronic time clocks. Employees clock in and clock off when they arrive and leave work, either by inserting a timecard into a time-stamping machine attached to a clock, or swiping an electronic card over a reader . These more sophisticated versions read a electronic tag. Time clocks are generally used where employees are paid on the number of hours worked and their shifts vary from time to time.
The hours recorded can be manipulated by clocking on and off at different times. This can be done by having someone else clock you in and out when you are not there, waiting around before clocking off or adjusting at the time on the clock when you clock in and out. Employees worked this one out soon after time clocks were introduced.
3. Falsifying the type of work done
The type of work done at different times may earn a different rate of pay. Some work may be dirtier, more hazardous or simply less appealing, and some form of loading may be added to the base pay rate to entice people to do that work. Falsely recording this work being done or the time doing it will increase the pay received. This is similar to the Time Sheet manipulation scheme, but where the employee works the usual hours and allocates it to the higher paid job.
How do you prevent these frauds?
Part of the answer is better controls, where appropriate. Business owners must be mindful that placing controls into the business system may cause inefficiencies or other problems that outweigh the possibility of any losses. Every business will be unique, so every solution will have to be unique. But if there are no controls, the opportunity for fraud greatly increases.
The more standardized the wages paid or the time worked by employees, the less opportunity there is to commit these frauds. For example, restrictions on overtime or requiring pre-approval of overtime will lessen (not eliminate) false overtime claims. Controlling or monitoring the comings and goings or employees may be possible and commercial, but standard start and finish times may reduce any need for monitoring.
Lessons to be Learned
1. False claims, whether for expenses or wages, have the same effect as the direct theft of monies. Individually the amounts may appear small, but over time they may add up to a significant amount.
2. Getting away with making false claims will become common knowledge to other employees. This adds to the likelihood that further false claims will be made. Because the claims are small in comparison to other business expenses, the employees may see nothing wrong with making a few of these claims.
3. Because these frauds may be well known to employees, tips from employees may be a best way of starting an examination into false claims.
4. It is common for verification of these types of claims to be fairly brief, especially if they are expenses that can be on-charged to clients. Controls on these areas may be minimal or nonexistent, or conducted by the people that are committing the fraud.
Prevention and Detection
Some things to look for
(i) Expense claims for days when the employee was not working, on weekends or holiday periods. There is little reason for an employee that is not on duty to incur expenses for business purposes. This could be an indication of a mischaracterization of expenses.(ii) Travel expense claims to locations that are not known for business purposes. There may be a legitimate reason for the employee to travel to that location, but their supervisor would probably be aware of that reason. This may indicate a claim for a personal expense.
(iii) Claims made without the original documentation attached. The original may not exist and the document may be an attempt to pass off a made up version, or the original documents may have been submitted with a second claim elsewhere for a double reimbursement of the one expense.
(iv) Claims for old expenses may indicate that the employee hopes that the passage of time will dull memories of the events and either allows a second claim for this expense or the claim for a false expense to be approved. Most employees will claim out of pocket expenses as soon as convenient.
(v) Any one employee that claims expenses that are regularly higher than other employees may indicate an employee that is making regular false claims.
(vi) Multiple employees claiming expenses from the same provider. This would be completely understandable where the business has some preferred suppliers, but may indicate that this supplier is being used to make a number of false claims. It is possible that someone has obtained a number of blank invoices and receipts and a number of employees are using same to make false claims.
Processed claims that do not have documentation attached. This may be a simple loss of the documents, or the loss may be intentional and aimed at hindering an investigation into the claim.
Some Basic Controls
(i) Require employees to submit detailed expense reimbursement requests, including original receipts and supporting documentation and details of the expenditure and reasons for that expenditure. Submitting original documentation limits the chance of a legitimate claim being used at a later date to make a second false claim. Requiring all supporting documentation makes it easier to review the claim with the relevant supplier.(ii) An independent review of expenditure reimbursements claims by the employee’s supervisor or manager before it is reimbursed. Casting an independent eye over a claim may highlight suspicious claims. But this will only work if the independent eye actually does a proper review of the claim.
(iii) Randomly checking expenses incurred directly with the supplier and verifying the invoice and payment. This audit of expenses should uncover any claims that are inaccurate or false.
(iv) Discussing unusual expense claims with the employee’s supervisor or coworkers. These people should have some knowledge of the relevant employee’s work, movements and possible legitimate claim. They may also provide information on suspicious claims that have been made.
(v) Claims should be made within a specified time period (at least weekly or monthly).
(vi) The person authorizing the claims should not be the same person that pays the claims. This should stop employees authorizing their own claims. or creating false claims under the name of another employee and keeping the money.
(vii) Each employee should be given a listing of the claims they have made and that have been rejected or paid in their name for their own records and to ensure that they are aware of all claims in their name. This should stop employees making claims in other peoples names.