Grant Thornton LLP warns about "D-I-Y" expense fraud

Technology makes expense fraud easier to commit and harder to detect, say forensic accountants who urge comprehensive internal review policies

TORONTO , Nov. 16 /CNW/ - When it comes to losses through theft, Canadian businesses and organizations are at a greater risk from internal theft by employees than from outsiders. According to the Association of Certified Fraud Examiners, expense account fraud alone comprises 20% of all cash misappropriation among Canadian organizations, yet as Grant Thornton LLP points out in a recent white paper, this type of theft has never been easier to perpetrate, thanks to easily available and widely used desktop technology and online sources.

"We are seeing more examples of expense account fraud which involves the submission of altered receipts," explained Jennifer Fiddian-Green, a Toronto-based partner with the forensic accounting and investigative services practice at Grant Thornton . "Scanners, colour printers and image-altering software make it easy to alter or even fabricate counterfeit receipts that can be used to claim false reimbursements. There are even Web sites that allow anyone to create fake receipts - purportedly for 'novelty purposes' - that look very realistic."

According to the Grant Thornton white paper "No Free Lunch," employee expense fraud is defined as the act of claiming and receiving reimbursement for expenditures that are not for the organization's benefit. Common forms of expense fraud include: single expenses being submitted numerous times for multiple reimbursements, turning in legitimate receipts that should have been balanced against already-advanced per diems, and claims made for payment for goods or services that have already been cancelled and refunded.

Even as this type of fraud is becoming easier to perpetrate, the current economic climate makes it more likely to occur. Employee theft can increase when individuals find their finances coming up short in periods of economic anxiety. Unfortunately, this is often when organizations are also cutting back on internal resources that are meant to detect and protect against fraud.

"While typical employee expense account frauds are relatively low dollar amounts, we have investigated a number of cases where expense frauds have been in the 6-digit range," says Pat McParland, a Vancouver-based principal with the forensic accounting and investigative services at Grant Thornton . "We've also enabled organizations to reduce questionable expense payments that could otherwise have run into that same range. While it is difficult to completely eliminate the chance of employee expense fraud, there are effective ways both to deter it and to ensure earlier detection."

Mr. McParland asserts that the best defence against expense fraud is a comprehensive organizational policy that combines appropriate internal controls with an ethical workplace culture. It starts with the understanding that any type of fraud will not be tolerated at any level of the organization. Whether the penalty is some form of internal discipline, (up to and including immediate dismissal) or legal action against the individual, make sure this message is effectively communicated throughout the staff chain, and among new hires (who should undergo background checks as part of standard HR practices).

"However, there are different levels of risk within any organization and good expense account controls should take that into account," Mr. McParland explained. "For example, the sales department may have more discretionary expense accounts than other departments with frequent travel and entertainment expenses. As a consequence, they may represent a higher risk area. So, if you need to ration your internal control resources, concentrate on the parts of your organization that pose the greater risk."

When it comes to reviewing and approving expense claims, Grant Thornton recommends a proper segregation of duties and auditing internal processes. Those individuals charged with the responsibility of approving expenses should look for any unusual trends behind the numbers. This could be individuals having inordinate expense levels in comparison to other employees holding similar positions or staff members travelling more than their job description might reasonably require. Abnormalities can have an honest explanation, but this diligence is what an expense review and approval regimen requires.

"We've seen it time and again: organizations that have methodical, comprehensive expense payment policies not only have less fraud, they're able to catch it more quickly, and the median dollar amounts of fraud are lower," Ms. Fiddian-Green concluded. "But behind the dollar losses - which can be significant - expense fraud can be symptomatic of bigger problems. It can lead to a workplace environment of corrupt entitlement, employee and management collusion for theft, and even bigger types of corporate fraud. It's ultimately a question of knowing what's right and wrong, and guiding your organization's ethics accordingly."

The Grant Thornton white paper, No Free Lunch is available for download at: grantthornton.ca/insights/white_papers.

Notes to editors:

About Grant Thornton in Canada

Grant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton has more than 3,100 people in offices across Canada . Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose member and correspondent firms operate in over 100 countries worldwide.

For further information: or to arrange an interview please contact: Peter Mumford, Compass Communications Inc., T. [phone] No.55, C. [phone], [email protected]