Don’t Let Expense Reports Negatively Affect the Bottom Line
March 22, 2018
Perhaps, there is no other area in a business that is more prone to deception than expense reports. If not handled properly, employees can take advantage of their employers by submitting personal expenses or inflating legitimate business expenses feeling confidant no expense item will be questioned. In many businesses, expense reports are routinely approved without review or questions asked of doubtful items. If the employee processing expense reports has no authority to question what has already been approved, then the result is:
• Inflated business expenses
• Lower net profit
• Non-taxable employee income
Travel, Meals, and entertainment
Travel, meals, and entertainment (T&E) are the most obvious expenses prone to abuse. Almost all businesses will have a certain amount of T&E to promote business. Some businesses depending on the industry will have more than others, and some employees will have more T&E expenses than others depending on their position in the company. Ordinary and reasonable business expenses are necessary and important for fostering certain customer relationships but should not open the door for abuse. Personal, inflated, and excessive expenses should be areas of concern for any business in which employees have T&E expenses that are reimbursed.
Typical examples of abusive expense reimbursements are:
• Personal and family meals and entertainment
• Expenses disallowed by the company but described on an expense report as allowed expenses (i.e., alcoholic beverages not allowed by company policy)
• Blank receipts from different businesses but completed by the employee with inflated amounts
• Expensive meals and entertainment going beyond what is considered normal
• Excessive automobile mileage
Accountability is a critical element in decreasing abusive expense reimbursements. When employees know that they will be held accountable for submitted expense reimbursements, they then actually become accountable with legitimate, required documentation such as:
• Type of expense (i.e., meal, entertainment, taxi)
• Detailed itemization (not summary credit card receipt)
• Date of expense
• Name and address where expense was incurred
• Business purpose
• Business relationship if customer is involved
Managers (if this level exists in a business) should be equally accountable for expense reports they approve. This can be the first line of defense in reducing or eliminating expense report abuses. Rather than automatically approving all expense reports, managers should review expenses and question doubtful or high cost items. Owners should, likewise, scrutinize all expense reports if this is one of their responsibilities absent managers. Money saved from abusive expense reports goes directly to the bottom line. When employees know that expense reports will not receive automatic approval, they will be become diligent in submitting only company-allowed expenses.
Second Line of Defense
As a second line of defense, clerks processing employee expense reports should be given authority to question doubtful expenses with the owner or employee’s manager. This type of communication among employees (or owner) dealing with expense reports is a crucial step in eliminating a majority of what might be disallowed expenses from actually being processed and paid.
It Really Does Matter
It should matter to any business of any size if non-business expenses get approved and processed. Discounting the effect that these payments have on net profit, approving abusive expense reports sets an example that the business is not interested in accountability and that “anything goes” as long as one is not caught. This is not at atmosphere or culture that should prevail in any business and is counter-productive to maximizing profitability.