How to Do an Expense Report Audit
Expense report audits work by matching receipts to transactions to look for red flags and patterns to uncover fraud, costly mistakes, and inefficiencies in the reporting process. And if the process no longer works for your company, consider getting rid of expense reports altogether and controlling costs with a spend management tool.
If your colleagues come in over budget month after month, or you spend more time than you’d like manually pre-approving purchases, you might be wondering if it’s time to conduct an expense report audit.
An expense report audit is the process of evaluating employees’ expenses to determine whether they meet your internal spending policies, such as those relating to expense amounts, types, and documentation. When conducting an audit, you check for errors in submissions and monitor how reasonable the expensed items are (that brand new patio furniture set? Maybe not necessary for Jim’s home office setup).
What are the benefits of auditing expense reports?
Conducting an expense report audit can be a major undertaking, but it’ll go a long way to helping the company. How?
Audits help identify expense fraud. Although most employees are trustworthy and will report actual expenses, there may be some who try to falsify expense reports. If expense reports aren’t thoroughly reviewed and expense fraud isn’t detected from the start, malicious employees may begin to feel like they can get away with manipulating the system. According to a study by the Association of Certified Fraud Examiners, the median loss from expense reimbursement fraud is $21,000. Auditing expense reports helps you stop fraud, prevent further abuse, and take disciplinary action.
Expense report audits also serve as an indication of whether your employees understand company expense policies. A policy that seems airtight to the finance leaders who created it may seem ambiguous to the employees who have to adhere to it. If you find that employees are making the same types of mistakes over and over again as you conduct an audit, that could be a sign you need to revise your policies and write them more clearly.
Ultimately, an expense report audit will help you control costs and gain insight into expense data. The daily demands of a finance manager’s role make it difficult to catch every irregularity in an expense report. When you set time aside to do a thorough review of expenses, you can uncover mistakes, fraud, and patterns that are costing the company lots of money. With the knowledge of this behavior, you can begin to take corrective action.
What are the steps involved in an expense report audit?
Here’s a step-by-step guide to conducting an audit of expenses:
1. Establish your expense report audit process
Determine how you’ll select which expenses to review and how often.
According to research by Peeriosity, one in three companies audits every expense report it receives, while half of the companies surveyed audit up to 40% of reports. If your team doesn’t have the capacity to review every expense report, decide how to choose which reports to audit. The expense report auditor can do a random selection, audit only the employees who spend the most, or audit all reports that surpass a certain spending threshold.
Then, decide how often to conduct audits. Eighty-four percent of companies surveyed audit their expense reports on a daily basis, 4% on a weekly basis, and 4% on a bi-weekly basis. If your company doesn’t process a high volume of expense reports, you may consider conducting audits only monthly or quarterly.
2. Review expense reports
The first step in reviewing expense reports is manually matching receipts to expense report submissions. Do the date, source, and amount on the receipt match what’s reported? Are the reported purchases allowed under your company’s expense policy?
3. Identify red flags
Look for the following red flags as you review receipts and reports:
- Incorrect expenses: The purchase listed on the report doesn’t match what’s printed on the receipt.
- Inflated amounts: The requested reimbursement is more than the amount listed on the receipt.
- Falsifying expense report invoices or receipts: The proof of purchase looks suspicious.
- Duplicate receipts: An employee tries to be reimbursed for the same purchase multiple times.
4. Investigate suspicious expense claims
People try to get away with crazy things on expense reports. For example, a Silicon Valley CEO once expensed a $75,000 strip club bill as client entertainment. A corporate executive filed an expense report for Botox injections so that she could look her best while moderating a panel. And a food supply salesman expensed two hotel rooms while on the road – one for himself and another for the garlic he was selling – citing that he couldn’t sleep in the same room as the pungent allium.
These extreme examples illustrate the worst-case scenarios you could run into. More sensible, yet out-of-policy, expense claims will be more difficult to uncover. Question any transactions that fall outside of company policy or seem to push the boundary of being “reasonable.” Watch out for:
- Personal expenses disguised as company expenses, such as a suit rental for a conference or companion travel expenses snuck into business expenses.
- Suspicious dining expenses, like an unusually generous tip or four entrees at a client dinner only meant for two people.
- Disallowed travel expenses, like taking a taxi to go two blocks, upgrading to first-class on a flight, or covering business trip expenses on days off.
After identifying suspicious claims, speak to employees directly to uncover whether they were honest mistakes, or fraud. If you uncover fraud, audit the employee’s other expense reports and bring up your discovery with HR. If you uncover mistakes that multiple employees are making, you should evaluate whether your policies are easy to misinterpret and should be rewritten.
5. Evaluate expense policies
After analyzing expense report minutiae, it’s important to look at expense reports holistically to see whether your policies still work for the company.
Evaluate how well managers and employees comply with company policies, obtain proper authorization, and adhere to timeframes for submitting expense reports. Can you remove friction – by streamlining a clunky approval process or using software to assist with receipt collection – to increase policy adherence?
Do some policies need to be updated to accommodate operational changes or an increasingly competitive environment? For example, perhaps it no longer makes sense for your team to share a single company card if your business is now completely remote, and it would be easier if every spender had their own corporate card.
Adjust your expense report process based on the findings of your audit.
What challenges will you encounter with an expense report audit?
Expense report audits are useful, but quite cumbersome for several reasons:
- First, there’s the issue of manually matching receipts to expense reports. This task is difficult and time-consuming, especially when paper receipts are incomplete or hard to read.
- Complex company spending policies make verifying policy adherence difficult. Such policies may be a necessary evil when a simple expense policy does not suit your operations or provide adequate protection from abuse.
- Because the review process is so time-consuming, the expense report auditor can realistically only review a sampling of reports or expenses that meet a certain threshold, so the audit may not be accurate or effective.
- Dealing with numbers is hard enough, but dealing with people makes expense reports even more challenging. Employee disputes are stressful, unpleasant, and time-intensive. Having to rely on employees to respond to inquiries can slow down the audit considerably.
- The auditing process is not scalable. As the company grows in revenue, expenses, and employees, there will be more expense reports, more questionable expenses, and more messy disputes, making audits increasingly complicated.
Expense report audits come with a whole slew of problems.
How can I eliminate expense reports with Lola.com?
Fortunately, there’s an easy solution to avoiding the complicated expense report audit. When you use Lola.com’s spend management software, you can eliminate expense reports altogether and forego the need for audits thanks to:
- Budgets that you can build on the fly and assign to departments, teams, vendors, and individual employees.
- Travel integration that lets employees make bookings on the same system your company uses to manage spending.
- Corporate cards that make it easy to track, manage, and review expenses.
- Card transaction limits and controls that make out-of-policy spending virtually impossible, eliminating the need for you to do an audit of expenses.
- Virtual corporate cards with individual account numbers that you can issue safely to every employee, eliminating the need for reimbursements and expense reports.
The purpose of an expense report audit is to have better control over company spending. Lola.com gives you unparalleled spend visibility and control.
The bottom line: Expense report audits have their limits
Expense report audits are a reactive approach to keeping company spending in check because they’re done when it’s too late to reverse any damage. Plus, they’re labor-intensive, prone to inaccuracy, and can’t keep up with your company as it grows.
Spend management is the proactive approach to controlling spending. With a spend management tool like Lola.com, your finance team has real-time visibility into company spending thanks to virtual cards that can be tied to budgets and policies. With transactions automatically approved or blocked depending on the amount or vendor, out-of-policy spending can’t happen. You’ll never have to conduct another expense audit again!