Improving Cost Reimbursement to Prevent Fraud and Avoid an Audit

Expense reimbursement is one of the most common areas where businesses go wrong with their accounting. Some cost reimbursement overstatements are simple mistakes (misunderstanding what does and does not count as a valid business expense), while others are fraud plain and simple (submitting fictitious expenses or padding expense reports). 

The word “reimbursement” in a text bubble.

​Whether the problem is nefarious in nature or not, incorrectly accounting for expense reimbursements can open a business up to an IRS audit. Being audited consumes time and resources even if the business being audited prevails. However, it can also cost a company in fees and penalties if misreporting problems are discovered. For this reason, improving cost reimbursement policies and processes should be a top priority for companies that want to not only mitigate fraud risk but also reduce their likelihood of being audited. 

​Creating a Formal Reimbursement Policy
You cannot improve what you are not actively managing, which is why having a formalized expense reimbursement policy in place as part of your overall accounting procedures manual is so critical. Clearly communicate with employees and management what can be expensed and how soon it needs to be submitted to avoid any ambiguity. And then stick to the policy! Where there is ambiguity or uncertainty, make it clear to employees that they are always welcome to ask questions about what is able to be expensed when there is a business case to be made for doing so.

Remember, a policy becomes meaningless if employees do not think they need to follow it. If management acts like they are above the rules or they let it slide when their employees are being lax with their expense report totals or timing, a culture will emerge that is indifferent to the policies that are in place. At that point, you might as well not even have policies in place because they are not doing any good (other than perhaps serving as merit for firing an employee who is exhibiting poor ethics).

Implementing Internal Controls
Minimize the opportunity for cost reimbursement fraud, by utilizing internal controls such as:

• Practicing separation of duties between employees that are submitting, approving, and granting reimbursements.
• Using access controls to prevent access to reimbursement requests and distributions.
• Requiring manager approvals on large or frequent expenses.
• Utilizing a standardized expense report template or accounting-integrated reimbursement app.
• Conducting periodic reimbursement audits to ensure receipts match up with reimbursement payments.
• Backing up reimbursement files to protect them from loss in the event of an unforeseen event.

Taking these steps erects higher barriers that mal-intentioned employees would need to overcome in order to commit fraud, thereby mitigating fraud risk to better protect the organization’s assets.

Utilizing Reimbursement Solutions
Organizations that are still requiring manual reimbursement requests will find huge efficiency gains as well as a significant increase in fraud prevention by switching to a cost reimbursement solution. There are so many standalone expense reimbursement solutions these days that streamline documenting, categorizing, approving, and paying out reimbursements. Most of these platforms also have apps that allow remote employees and/or employees in the field to submit reimbursement requests on the go to speed up the process and improve employee satisfaction with the process.

When evaluating expense reimbursement software ensure that whatever you select will easily integrate with your existing accounting platform to avoid needing to do any API integration or workarounds to get them to “talk” to each other. Your accountant should be able to give you advice on which software will make the most sense for your unique business needs.

Conducting Reimbursement Audits
Audits are a key part of internal controls, especially among companies that have a significant portion of their employees working remotely, where internal controls are more likely to fail. However, because they have not historically been easy to do, some companies do not do them as often as they should (or at all). If you are using expense reimbursement software, lean on it to help you simplify the process. Regularly check reimbursements to verify that they are within budget and do not raise any fraud red flags. Conducting regular audits not only helps to prevent fraud and minimize audit risk, but also aids in overall strategic business management by helping to measure current business activities against budgeted values.

When you need help with cost reimbursements and other accounting functions, look no further! We offer US-based outsourced accounting services to businesses and nonprofit organizations on a part-time and limited-time basis. Find out more today!