Controls for Expense Reports (#6)
/In this episode, we discuss the controls associated with expense reports. These reports have historically been reviewed by the accounting staff in detail, even though few errors are ever found. There are more streamlined ways to deal with expense reports, as discussed in this episode. Key points in the podcast are noted below.
How Expense Reports Have Been Handled
Expense reports are the summarization of a variety of expenses paid for by employees, and for which they want reimbursement. The trouble is that none of the items paid for by the employees were initially approved by an authorized person, so the company is faced with the problem of sorting through the mess to figure out which expenses are valid, and which will be rejected.
The old fashioned control approach to expense reports is to review 100% of the receipts submitted, in excruciating detail, then go back and forth with employees and supervisors about what expenses will be allowed or rejected, and eventually reimburse an amount that is suspiciously close to the total amount shown on the original expense reports. In other words, after all that review work, most companies pay the full amount of every expense report submitted.
There has to be a better way to control expense reports. There is. Actually, there are several approaches.
The Partial Expense Report Review
First -- a much less expensive alternative to the full report review is the partial review. This means that only a few expense reports are fully reviewed, but if errors or possible cases of fraud are found, then the person submitting the expense report will be subjected to a full review from that point forward. Even better, it makes sense to review their expense reports for the past few years to see if there’s been an ongoing problem. In addition, it’s very useful to inform all employees that expense reports are being spot checked, which should prove to be a sufficient deterrent for most people to submit accurate expense reports.
Have the Company Directly Pay for More Expenses
Another approach is to keep as many expenses as possible from appearing on employee expense reports; since the largest expense item is almost always reimbursement for travel expenses, it makes a great deal of sense to route all travel through a booking person within the company, who can coordinate the approval of employee travel before any bookings are made.
Of course, the company pays for all travel directly, rather than through employee expense reports. The result is that inappropriate travel can be stopped before it occurs, while the total dollar amount of expense reports submitted declines drastically. The problem here is that many people like to make their own travel arrangements, and will resent having the company do it for them.
Use an Automated Expense Reporting System
Yet another approach is to create or purchase an automated expense reporting system, into which employees enter their expense information. This approach avoids the use of manual or spreadsheet-based reports, which tend to be full of errors, while also allowing for the imposition of travel policies at the point of data entry. These rules keep employees from entering expenses that’re not allowed under company travel rules. Examples of such software packages are those produced by Concur and Extensity.
Create a Travel Policy
Another approach to expense report controls is the travel policy – this policy defines exactly what expenses are allowable and (more importantly) not allowable, as well as the penalties to be imposed for breaking the rules.
Parting Thoughts
Here is my interpretation of employee expense reports: Conducting a 100% review of all expense reports is wildly inefficient, and rarely even begins to pay back the cost to review them. Consequently, an occasional audit will be sufficient. Furthermore, it’ll quickly become apparent which employees are causing reporting problems, and which ones submit such squeaky clean expense reports that they can safely be ignored. Also, requiring centralized bookings will not only improve controls, but also presents the opportunity for lowering travel costs by centralizing with a small number of travel suppliers. Keeping tight control over whether travel occurs at all is the best way to control expense reports, since this can save thousands of dollars by preventing a trip entirely. Conversely, most other expense report controls are more focused on saving just a few dollars here and there.
Also, smaller companies can get by just fine with expense reports that are submitted on spreadsheets, despite the occasional errors that will creep into these reports. On the other hand, companies dealing with hundreds or thousands of expense reports will find that more automated expense reporting systems will be cost effective.
Finally, travel policies should certainly be issued on a regular basis, but in reality few people look at them, so they’re most useful as a partial deterrent.