Accounting for advances to employees and officers

3. Internal controls for employee expense reports

Employee expense report schemes can be very costly. They can range from free lunches to purchases of expensive gifts and international travel. Employees can overstate business expenses in many ways:

  • by altering receipt copies
  • by providing counterfeited receipts
  • by providing the same receipts for multiple reimbursements
  • by overspending (e.g., buying first-class air tickets)
  • by listing fictitious expenses
  • by listing expenses of others (e.g., other employees, clients) 

An employer can set the following internal controls for employee expense reports (non-exhaustible list):

  • The company should issue a set of policies concerning appropriate (allowable) business expenses.
  • It is advisable to require a detailed expense report (e.g., date, time, place, business nature).
  • Expense reports should be approved by a supervisor.
  • Employees should provide original receipts
  • It is helpful to audit expense reports at random and follow-up with employees regarding unauthorized expense submissions. For example, an employee might mischaracterize personal expenses as overnight travel. In such a case, during the audit the company can compare the employee expense report with the employee’s work schedule.
  • The company can audit for consecutively numbered receipts from the same establishment (e.g., restaurant, taxi)
  • Repeat offenders should be audited more often (i.e., not at random).
  • The company can establish an automated expense reporting system with an interface that can spot violations.
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