Between 2002 and 2009, a manufacturing company was defrauded of $1 million through fraudulent expense claims. A business expense policy can include measures such as spending limits that can keep workers from having huge expense claims and committing fraud. After all, employee expense fraud is responsible for 14.5% of all fraud.
Trustpair protects against employee fraud and internal fraud thanks to ongoing account validation. The platform secures the P2P cycle and company assets.
What is an expense policy?
An expense policy is an internal framework that enforces what employees can do with company money and how they can spend it.
This process can be listed on a document that has to be signed when an employee joins a business.
It will usually include rules on how to submit expense reports and get reimbursed for expenditures by the finance team. It should also mention expectations of workers for how they should respect the employee expense policy.
For example, if you have to travel from New York to Chicago for an in-person business meeting, you could report the travel expenses as set out by the company expense policy.
An expense policy will usually set a maximum amount for different types of expenses. For example, for a company trip, employees would be given a limit on the:
- Number of nights in the hotel
- The amount available for food and drink
- Flight or travel expenses
Why is it important to have a business expense policy?
Several key reasons highlight the importance of a business expense policy:
Stops excessive employee spending
Limits on employee spending mean that company funds are protected. This limit stops maverick spending which are purchases that go against the procurement policy of a company.
Allows you to control and predict expenses
A business expense policy clears up grey areas surrounding expenses.
The rules also mean that you can have a set allowance for employee expenses and you can roughly know how much will be spent per month to help you stay on top of cash flow.
For example, some employees may have a £200 limit for travel expenditure per month. If a worker needed to go over this, they would have to make a request to a more senior figure in the team to get approval. This process enables companies to be aware of exactly how much they are spending on expenses.
Limits the chance of employee fraud
Having set rules surrounding expenses also limits the chances of an individual committing internal fraud and employee fraud through fraudulent expense claims.
Learn more about employee fraud prevention here.
One rule may be that expenses over a spending limit must be approved to avoid internal fraud and documentation such as a receipt should be provided to get a reimbursement.
A rule like this could have been helpful in the case of the manufacturing company that was the victim of fraudulent expense claims that cost $1 million.
Former executives put claims in for pretend business expenses. However, these claims were actually for the likes of mortgage payments on timeshares in Barbados, a dog sofa, luxury bedding, furniture, and personal legal fees.
One of the executives forged receipts and invoices to purport that the expenses were for business and not personal use. Employee fraud is one of the challenges of treasury management.
How can you create an effective expense policy?
There are several steps you can take to create an expense policy:
1. Define expenses
Set out the different categories of expenses that your company will have.
These expenses could include:
- Business travel (transport, accommodation costs)
- Food and drink
- Credit card fees
- Hospitality and entertainment services
- Employee benefits
- Professional training or education, such as university fees
- Office Supplies
Also, employees must be aware of what is not covered by expenses. So, including a list of these in the document is important.
This could include:
- Items for your home, such as furniture
- Parking fines
- Personal shopping trips
- Personal legal fees
- Spouse travel, food, and drink
For example, in 2023 a banking company won an employment tribunal following the sacking of a worker who claimed expenses for two sandwiches, two coffees, and two pasta dishes during a business trip to Amsterdam. The former employee didn’t originally disclose that some of it was for his partner.
The bank argued that the expense claim broke its expense management policy, where travel and meals for spouses can’t be reimbursed. People involved whose meals are submitted for reimbursement must also be listed.
2. Communicate these changes with employees
If it’s the first time an expense system has been introduced, it is a wise idea to communicate these changes so workers can appreciate why they are needed.
Equally, employees will need to know what expenses are covered by which categories, the process for how they can be reimbursed, and if there are any spending limits too. If so, workers will need to know the process to get approval to go over the spending limit if required.
3. Ensure simplicity
Ensure employees can access and understand the rules easily. Expenses don’t need to be overcomplicated so don’t make them.
4. Explore automation
Automation can also streamline expense management. For example with a platform like ExpenseIn, you can set rules and criteria that expenses have to follow. After expenses are submitted, the ExpenseIn system compares them versus these criteria.
5. Align with regulations
Ensure that expense policies are aligned and compliant with current rules and regulations. For example, ensure that you cross-check your expense policy with IRS regulations that cover deducting business expenses.
6. Keep the policy fresh
Ensure that you keep the policy fresh as situations and societal norms change. For example, before the pandemic 15% of U.S. businesses offered employees the chance to work from home half of the time. Now, one quarter (25%) of companies do.
As a result, you may have to change your business expense policy to reflect that. For example, some companies have added home expenses in their expense policy to adapt to remote work. This could include WiFi or allowing payment for an office chair at home.
Recap
Businesses need a clear expense policy to control and predict expenses, limit the chance of employee fraud, and stop company money from being overspent. To create an effective expense policy; define expenses; communicate the changes; ensure it is simple; explore automation; align it with regulations; and keep it fresh. Trustpair protects against employee fraud and internal fraud due to continuous account validation.
