Compliance and Fraud: What You Can't See Can Cost You

As the way in which we do business and the ways that employees spend on behalf of organizations continue to increase in complexity, issues around compliance and fraud are also increasing in complexity. Many organizations currently perceive that their policies and processes are “good enough” because they either haven’t had a major issue to contend with yet, or that they trust their employees to be honest about their company spending. However, there are many things to consider in today’s landscape. The world has changed and the way finance departments are managing spend needs to evolve with it.

Employee spending has complicated spend management

Employees today are spending more money across more spend categories and using more payment methods than ever before. Additionally, suppliers are developing direct and personal relationships with your employees, and the consumer-like technology used to make purchases is the new normal. This spending behavior is what we call employee-initiated spend, and the influx of channels of employee spend creates numerous points of potential risk for accidental or intentional policy violations and fraud without a capacity to capture spend across all categories and from all suppliers:

• 37% of business travelers had at least one exception on the T&E reports 
• $2,448 was the average reimbursement amount requested by employees who submit fraudulent claims 

Additionally, travel vendor choices and payment methods are continually expanding:

• $282B U.S. mobile payments volume will triple by 2021
• $20B amount of gross bookings on Uber in 2016
• $77M worth of Airbnb stays – 320,000+ expenses – by SAP Concur end-users in a recent two-year period

Expense and travel is a major area vulnerable to fraud and compliance risks

The Association of Certified Fraud Examiners (ACFE) conducts a study every two years on the topic of occupational fraud, when the employee is the perpetrator of schemes defrauding their organization. Asset misappropriation was by far the most common form of occupational fraud, though the least-costly, occurring in more than 89% of cases and resulting in a median loss of $114,000. Examples of asset misappropriation include employees embezzling company assets, falsifying timecards, and padding travel and expense claims. On the other hand, financial statement fraud schemes are the most common and most-costly, accounting for 10% of cases and a median loss of $800,000.

The ACFE has identified travel fraud schemes occurring at organizations today, including:

• Profitable per-diems: The fraudulent activity that can occur, even for the most ethical traveler, is instead of utilizing the daily allowance (per-diem), the traveler decides to profit from it by using a small portion of the allowance, and then pocketing the rest.
• Mileage padding: Without proper controls in place, it’s difficult to validate mileage claims, especially if you’re still utilizing a manual log instead of GPS tracking capabilities. This leaves the door open for fraud perpetrators to pad by a little or by a lot.
• Fake expenses: If you have a policy that does not require a receipt for expenses under a certain amount, employees could take advantage of you. For example, they could submit an expense for breakfast under the limit amount without a receipt, when in fact, they ate breakfast free at the hotel.
• Unused airline tickets: Fraudulent activity occurs when a ticket has been booked for a business trip that gets cancelled or rescheduled, then the employee books and expenses a second ticket instead of paying a small fee to cancel or rebook on the first ticket. Now, the employee has a free airline trip at the expense of your organization.
• Last-minute flight bookings: The closer to a travel date that a ticket is purchased, the more it costs – and frequent travelers will know that more expensive tickers are easier to upgrade. The cost of the ticket opens the door for an opportunist to obtain upgrades and rewards by booking their travel at the last minute. 

Additionally, difficult-to-detect expense fraud schemes include:

• Double-dipping: This occurs when an expense is claimed twice. For example, if two employees dine together and they each get a receipt for the total bill, and both employees claim the entire meal instead of their individual meal.
• Pattern identification: Without an integrated spend management system in place, you miss a huge opportunity for reporting capabilities to analyze and uncover spend patterns, and prevent fraud that is hard to detect.
• Schemes that work across different financial systems (AP, T&E, P-card): Opportunists will inevitably continue to find new ways to defraud a singular system, therefore, predictive learnings across multiple systems will help you catch fraudulent activity and patterns – whether it’s a T&E or corporate card scheme – by pulling in data from your CRM, accounting systems, and more.

Fraud and compliance violations are expensive

With the overwhelming number of regulations and standards globally, it’s challenging for organizations to have confidence in their spend data for ensuring compliance. It’s critical now, more than ever, to put the right technology in place to detect and prevent risks around fraud and compliance. Without the right systems, it takes a lot of time and resources to build and maintain the expertise required just to understand all the regulations and policies necessary to create a culture of compliance.

Not complying with government rules and regulations is not an option for any organization. Furthermore, not playing by the rules can lead to crippling fines, property seizure, incarceration, and more.

Top fraud expenses organizations incur include:

• 5% of a typical organization’s annual revenues are lost due to fraud 
• 89% of fraud cases involve asset misappropriation, including padding T&E claims
• $114K is the median loss from asset misappropriation

Top penalties for Foreign Corrupt Practices Act (FCPA) violations include:

• $1.78B by a multinational petroleum company
• $965M by a Swedish telecom
• $850M by a Russian mobile operator

Monetary loss is not the only risk that fraud and non-compliance can bring upon an organization.Reputational risks and legal ramifications can be worse than losing money. ACFE found that, in the past 10 years, 16% fewer cases of occupational fraud were reported to law enforcement due to the fear of bad publicity: loss of confidence with the board, partners, and shareholders; and potential employee fallout.

Putting fraud safeguards in place is essential

When employees accidentally violate the rules, or worse, commit outright fraud, the cost can be substantial and your organization gets exposed to unnecessary risk. Organizations with proactive data monitoring/analysis reduced their losses to fraud by 52%.

SAP Concur can help put safeguards in place. In addition to offering best-in-class expense and travel solutions, we can be your partner in preventing fraud and ensuring compliance across your organization by:

• Creating industry-leading policies: SAP Concur has decades of experience creating expense policies for companies of all sizes. Our experts can help craft one unique to your organization with best practices and robust workflows built in.
• Simplified expense reporting: Our apps make it simple for end users to submit expenses and receipts, meaning faster reporting and more accurate data from the get-go.
• Uncovering hidden spend: We can provide full visibility into employee travel spend, even if employees book outside of approved tools.
• Audit preparation: Our tools offer an automatically created audit trail for every employee-initiated transaction.
• Outsourced audit expertise: Our skilled audit team provides objectivity, multi-language support, and quick turnaround for expense report reviews.

Fraud and compliance risks exist at every organization of every size, of every industry, and in every location. To learn more, please visit https://www.concur.com.hk/compliance-fraud