How to tackle the UK scourge of expenses fraud How to tackle the UK scourge of expenses fraud

How to tackle the UK scourge of expenses fraud
23 Nov 2018

The frequency and cost of both fraud and cybercrime have grown exponentially over the last few years, to the point where they now represent over half (54%) of all crime in the UK.

Research undertaken by our forensics team, in collaboration with the University of Portsmouth’s Centre for Counter Fraud Studies, has revealed, for example, that the country loses more than £190 billion (US$244.50 billion) annually to fraud. Private sector organisations are worst hit, to the sum of an estimated £140 billion (US$180 billion). The public sector comes next at £40.4 billion (US$52 billion), while charities and individuals make up the rest.

One of the issues here is that, as technology becomes more sophisticated, so fraudulent activities do too, with criminals targeting both businesses and individuals through digital and online means. But while these scams may have become increasingly complex, it is also important to be alert to low-level opportunistic fraud as well.

Expenses fraud

Employers need to be able to trust their employees when doing their day-to-day work – and this includes being confident that they are submitting fair and honest expenses based on existing policies for any costs incurred during the course of their duties.

Although it is important to remember that the vast majority of staff do behave honestly, one in 10 UK employees admit to submitting erroneous claims ‘all the time’, while a further one in five do so ‘irregularly’. The most common issues involve exaggerating mileage (27%), buying office supplies and keeping them for personal use (20%), and altering taxi receipts to claim a higher fare (16%). Such activity is estimated to cost UK business around £2 billion a year.

So not only do these kinds of fraudulent expenses generate unplanned business costs, but companies also face significant reputational risk if widespread fraud becomes public knowledge. They could also end up incurring significant tax bills too.

While most employers prefer to believe that they are unlikely to be hit by fraud, several high profile cases remind us that it can affect any business of any size at any time:

Procurement fraud

According to our Annual Fraud Indicator (AFI) report, procurement expenditure in the UK was worth nearly £2.6 trillion (US$3.34 trillion) in 2017, while non-financial, private sector sales incomes totalled £3.9 trillion (US$5.01 trillion). For obvious reasons, this makes procurement fraud a very attractive target for fraudsters.

But one of the problems here is that the procurement process involves multiple parties and individuals who, more often than not, do not work in close proximity with one another. This can lead to instances of ‘common’ fraud taking place, such as legitimate suppliers adding unauthorised additional costs to invoices.

Another issue is payroll fraud, which involves activities such as employees filing false overtime claims or adding ‘ghost’ employees to the system.

The AFI report estimates that procurement fraud, which includes expenses fraud, accounts for 4.76% - the equivalent of £121.4 billion (US$156.06) - of UK company expenditure each year, with losses from payroll making up £12.7 billion (US$16.32 billion) of this. As a result, it is essential that organisations put effective cost controls in place.

Her Majesty’s Revenue & Customs (HMRC) has recently upped its focus on understanding what controls businesses have introduced to limit the likelihood of fraud and error occurring. Changes to accounting regulations, HMRC risk ratings and a requirement for sign-off from senior accounting officers all mean there is now greater pressure to account for every penny that passes through the books.

But a well-controlled and managed system will help to mitigate any penalties that HMRC may levy. It should also be remembered that if you are subject to an HMRC risk review, are not in a position to provide expense receipts and are without an HMRC approval notice, the tax authorities will not be able to deduct any VAT paid on employee purchases from your total VAT bill.

In addition, any payments to employees that are unaccounted for will be classed as either pay or a benefit in kind, both of which are subject to tax and national insurance contributions as well as possible interest payments and penalties.

How to safeguard against expenses fraud

Putting effective safeguards in place to counter fraud need not be an expensive or complicated business. Here are a number of things you can do:

  • Maintain a clear expenses policy and ensure it is clear and easy to understand. Communicate the policy regularly to employees and include examples of ‘good’ and ‘bad’ behaviour. Ensure, as a manager who signs off expenses, that you know what to look out for and understand your responsibilities in checking what is permissible under the policy. If the policy is amended, ensure you can prove that staff have been made aware of the changes;
  • Require original documentation to be either submitted with claims or kept for a period of time for audit purposes. HMRC may ask to see such documentation, even if the business does not require it itself;
  • Initiate formal review processes, or introduce spot checks by the finance department, HR, or both, to ensure expenses meet the organisation’s established guidelines or policy. Part of this review should involve ensuring that proper documentation exists to support any expenses that were paid. If necessary, expenses should also be checked against a member of staff’s diary;
  • Routinely question expenses that look unusual or abnormal;
  • Check that all expenses claimed have been put through recordable channels and not just taken as petty cash. In addition, if you ask staff to claim expenses on a regular rather than quarterly or annual basis, it makes it easier for you as a manager to recall their claim, if necessary;
  • Ensure the expenses of senior staff and non-executives is signed off by another senior team member such as the finance director;
  • Make certain that employees do not hold on to expenses until you, as their line manager, return from leave. Often a fresh pair of eyes on the process will add an extra layer of control;
  • Obtain activity reports for items, such as credit cards, from the issuing company on a monthly basis. These reports can help you stay on top of any activity and compare how expense reporting tallies up;
  • Treat reimbursement activities consistently: either ask employees to pay out for expenditure initially and seek reimbursement later, or pay expenses to the staff member directly to avoid reimbursement being duplicated;
  • Deal immediately with any offenders found to be violating or falsifying their expense reports to deter others from following suit. Also ensure the organisation’s policy makes it clear that expenses fraud amounts to gross misconduct.

While it is worth remembering that the vast majority of employees do not knowingly submit fraudulent expenses claims, it can, and does, happen. But ensuring that robust policies and procedures are in place, and that they are subject to regular review and random audits, can help keep business costs under control and enable you to meet HMRC requirements.

 Susan Ball

Susan Ball is a partner at Crowe UK and heads up its Employers Advisory Group. She has more than 30 years’ experience focusing on UK and overseas employment tax, social security, investigations and rewards.  Susan also sits on the Council of the Chartered Institute of Taxation (CIOT) as well as on its Employment Taxes sub-committee.

OTHER ARTICLES THAT MAY INTEREST YOU

How to assess payroll risks

Combatting payroll fraud

Eight steps to prevent payroll fraud

The frequency and cost of both fraud and cybercrime have grown exponentially over the last few years, to the point where they now represent over half (54%) of all crime in the UK.

Research undertaken by our forensics team, in collaboration with the University of Portsmouth’s Centre for Counter Fraud Studies, has revealed, for example, that the country loses more than £190 billion (US$244.50 billion) annually to fraud. Private sector organisations are worst hit, to the sum of an estimated £140 billion (US$180 billion). The public sector comes next at £40.4 billion (US$52 billion), while charities and individuals make up the rest.

One of the issues here is that, as technology becomes more sophisticated, so fraudulent activities do too, with criminals targeting both businesses and individuals through digital and online means. But while these scams may have become increasingly complex, it is also important to be alert to low-level opportunistic fraud as well.

Expenses fraud

Employers need to be able to trust their employees when doing their day-to-day work – and this includes being confident that they are submitting fair and honest expenses based on existing policies for any costs incurred during the course of their duties.

Although it is important to remember that the vast majority of staff do behave honestly, one in 10 UK employees admit to submitting erroneous claims ‘all the time’, while a further one in five do so ‘irregularly’. The most common issues involve exaggerating mileage (27%), buying office supplies and keeping them for personal use (20%), and altering taxi receipts to claim a higher fare (16%). Such activity is estimated to cost UK business around £2 billion a year.

So not only do these kinds of fraudulent expenses generate unplanned business costs, but companies also face significant reputational risk if widespread fraud becomes public knowledge. They could also end up incurring significant tax bills too.

While most employers prefer to believe that they are unlikely to be hit by fraud, several high profile cases remind us that it can affect any business of any size at any time:

Procurement fraud

According to our Annual Fraud Indicator (AFI) report, procurement expenditure in the UK was worth nearly £2.6 trillion (US$3.34 trillion) in 2017, while non-financial, private sector sales incomes totalled £3.9 trillion (US$5.01 trillion). For obvious reasons, this makes procurement fraud a very attractive target for fraudsters.

But one of the problems here is that the procurement process involves multiple parties and individuals who, more often than not, do not work in close proximity with one another. This can lead to instances of ‘common’ fraud taking place, such as legitimate suppliers adding unauthorised additional costs to invoices.

Another issue is payroll fraud, which involves activities such as employees filing false overtime claims or adding ‘ghost’ employees to the system.

The AFI report estimates that procurement fraud, which includes expenses fraud, accounts for 4.76% - the equivalent of £121.4 billion (US$156.06) - of UK company expenditure each year, with losses from payroll making up £12.7 billion (US$16.32 billion) of this. As a result, it is essential that organisations put effective cost controls in place.

Her Majesty’s Revenue & Customs (HMRC) has recently upped its focus on understanding what controls businesses have introduced to limit the likelihood of fraud and error occurring. Changes to accounting regulations, HMRC risk ratings and a requirement for sign-off from senior accounting officers all mean there is now greater pressure to account for every penny that passes through the books.

But a well-controlled and managed system will help to mitigate any penalties that HMRC may levy. It should also be remembered that if you are subject to an HMRC risk review, are not in a position to provide expense receipts and are without an HMRC approval notice, the tax authorities will not be able to deduct any VAT paid on employee purchases from your total VAT bill.

In addition, any payments to employees that are unaccounted for will be classed as either pay or a benefit in kind, both of which are subject to tax and national insurance contributions as well as possible interest payments and penalties.

How to safeguard against expenses fraud

Putting effective safeguards in place to counter fraud need not be an expensive or complicated business. Here are a number of things you can do:

  • Maintain a clear expenses policy and ensure it is clear and easy to understand. Communicate the policy regularly to employees and include examples of ‘good’ and ‘bad’ behaviour. Ensure, as a manager who signs off expenses, that you know what to look out for and understand your responsibilities in checking what is permissible under the policy. If the policy is amended, ensure you can prove that staff have been made aware of the changes;
  • Require original documentation to be either submitted with claims or kept for a period of time for audit purposes. HMRC may ask to see such documentation, even if the business does not require it itself;
  • Initiate formal review processes, or introduce spot checks by the finance department, HR, or both, to ensure expenses meet the organisation’s established guidelines or policy. Part of this review should involve ensuring that proper documentation exists to support any expenses that were paid. If necessary, expenses should also be checked against a member of staff’s diary;
  • Routinely question expenses that look unusual or abnormal;
  • Check that all expenses claimed have been put through recordable channels and not just taken as petty cash. In addition, if you ask staff to claim expenses on a regular rather than quarterly or annual basis, it makes it easier for you as a manager to recall their claim, if necessary;
  • Ensure the expenses of senior staff and non-executives is signed off by another senior team member such as the finance director;
  • Make certain that employees do not hold on to expenses until you, as their line manager, return from leave. Often a fresh pair of eyes on the process will add an extra layer of control;
  • Obtain activity reports for items, such as credit cards, from the issuing company on a monthly basis. These reports can help you stay on top of any activity and compare how expense reporting tallies up;
  • Treat reimbursement activities consistently: either ask employees to pay out for expenditure initially and seek reimbursement later, or pay expenses to the staff member directly to avoid reimbursement being duplicated;
  • Deal immediately with any offenders found to be violating or falsifying their expense reports to deter others from following suit. Also ensure the organisation’s policy makes it clear that expenses fraud amounts to gross misconduct.

While it is worth remembering that the vast majority of employees do not knowingly submit fraudulent expenses claims, it can, and does, happen. But ensuring that robust policies and procedures are in place, and that they are subject to regular review and random audits, can help keep business costs under control and enable you to meet HMRC requirements.

 Susan Ball

Susan Ball is a partner at Crowe UK and heads up its Employers Advisory Group. She has more than 30 years’ experience focusing on UK and overseas employment tax, social security, investigations and rewards.  Susan also sits on the Council of the Chartered Institute of Taxation (CIOT) as well as on its Employment Taxes sub-committee.

OTHER ARTICLES THAT MAY INTEREST YOU

How to assess payroll risks

Combatting payroll fraud

Eight steps to prevent payroll fraud

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