Expense fraud should be a real concern for all businesses. But while large companies have whole accounting teams and complex financial control processes, SMEs tend to rely on the diligence and honesty of employees to avoid serious harm.
But honesty and good intentions are often not enough. Whether intentional or accidental, fraudulent expense claims can cost even small companies thousands each year. By one estimate, the annual cost to businesses could soon pass $200 billion.
If left unchecked, small transgressions can become lasting bad habits. Small businesses risk financial losses, cash flow shortages, compliance violations, and real reputational damage.
Alarming stuff, but it doesn’t need to be. This article examines the four most common forms of expense fraud for SMEs, and how to avoid them.
What is expense fraud?
Expense fraud happens when employees submit claims for expenses they are not entitled to, resulting in unnecessary financial losses for businesses. Expense fraud can take many forms, from overstating travel expenses to claiming personal purchases as business-related costs.
A few common examples include inflated mileage claims, personal purchases using company funds, and exaggerated taxi fares. It could even include choosing a private taxi over other public transport, if that goes against company policy.
Crucially, expense fraud can be intentional or unintentional. While the form is more concerning, both hurt your company’s cash flow. Without proper oversight, these fraudulent claims can add up, impacting a company’s bottom line and creating challenges for financial teams trying to maintain accurate records and budgets.
Fraudulent expense claims can be subtle and difficult to detect, if you rely on manual expense tracking and approvals. As businesses grow, so do the risks of improper expense submissions.
To protect your company’s bottom line, it’s essential to understand the most common types of expense fraud and how tools like spend management platforms can help mitigate risk.
4 types of fraud to watch out for
Business expense fraud comes in various forms, some more obvious than others. But they all share the same basic principle: employees claiming reimbursement for costs that are either outside of company policy, or not really business expenses in the first place.
Here are the four most common expense fraud types, and how to spot them.
- 1. Inflated expense claims
Inflated claims occur when employees deliberately increase the cost of legitimate business expenses. For example, an employee might report a higher amount than they actually spent on meals, transportation, or accommodation. Examples of inflated expense claims:
- Overstating mileage on a business trip
- Rounding up meal expenses beyond their actual cost
- Requesting full reimbursement for group meals when others contributed
- Upgrading hotel stays or flights without approval
Why it’s a problem
Some employees may see small exaggerations as harmless. Others may just get their mileage calculations wrong. But these costs add up over time. Inflated expense claims can cost businesses thousands per year if left unchecked.
How spend management platforms prevent inflated expense claims
It’s much harder to miscalculate or over-inflate numbers if computers do the calculations for you. Spend management platforms include:
- Automated receipt matching: Ensures submitted expenses align with actual transaction amounts
- Real-time reporting: Identifies anomalies in spending patterns for early detection
- Pre-set spending limits: Prevents excessive claims and unauthorized purchases
And perhaps your best option is to give team members corporate cards with carefully set limits. That way, there’s no claim after the fact, and no calculations required.
- 2. Duplicate reimbursements
Some employees may submit the same expense multiple times, either by mistake or with fraudulent intent. This often happens when an expense is split across in budgets, or when a receipt is submitted both digitally and on paper.
Examples of duplicate reimbursements
- Submitting the same meal receipt twice – once as a digital receipt and once on a printed report.
- Two employees submitting the same claim. Both attend a meal, and attempt to claim the full amount rather than splitting the cost.
- Claiming an expense on two different reimbursement requests over multiple months.
Why it’s a problem
Duplicate expense fraud is particularly difficult to detect in manual tracking systems. Without a centralised expense management platform, businesses can easily reimburse employees twice for the same charge. While that may not seem like a major issue once or twice, it’s a real problem if it becomes commonplace.
How spend management platforms prevent duplicate reimbursements
Automated checks will always beat the human eye, particularly at scale. Spend management tools check every single receipt to make sure that it’s legitimate, original, and doesn’t contain any worrying purchases.
- AI-driven detection: Flags duplicate transactions before they are approved, even where the claimants or the receipts used are different.
- Centralised expense tracking: All receipts are submitted to the same system, which ensures that no claim is reimbursed twice.
- Audit trails: Provide full transparency into past claims for better accountability. And you don’t have to rummage through the filing cabinet to see if you’ve already paid someone.
Digitized, centralized recordkeeping is simply your best defense against duplication.
- 3. Personal expenses disguised as business costs
Expense misclassification is one of the most common forms of expense fraud. This occurs when an employee disguises personal costs as business-related expenses. For example, an individual might dine out with friends but submit the bill as a client meeting, falsely claiming reimbursement for a non-business expense.
This is often harder to detect as personal and business lives become more entwined. Costs like meals, fuel, travel, and even online subscriptions could easily be legitimated business expenses and charged to the company under the guise of work-related expenses. Which makes careful spend management even more important.
Examples of misclassified costs
- Charging personal shopping or entertainment to a corporate card
- Submitting a meal receipt with family or friends as a “business dinner”
- Using a company credit card for fuel costs on personal road trips
- Taking personal software subscriptions under the company budget
Why it’s a problem
This type of fraud is hard to catch without clear policies and monitoring systems in place. Employees who frequently travel or entertain clients may exploit loopholes in expense policies to claim personal costs as business expenses.
How spend management platforms prevent personal expense fraud
Spend management software monitors employee expenses more closely and faster than any human controls ever could. It does this through:
- Expense categorisation tools: These separate business and personal expenses automatically.
- Virtual and physical corporate cards: Smart cards control spending by category, and restrict certain employees from specific classes of expenditure.
- Role-based approvals: Require manager review and authorisation before reimbursement. Managers can also see which employees spend the most, and can quickly view costs if they seem incorrect.
- AI-powered recommendations: AI tools look for unusual patterns, and flag worrying behaviour immediately.
Again, the biggest benefit is knowing that you have automated tools checking every single claim so you don’t have to. They flag anything suspicious or surprising, and you can dive in for closer examination.
- 4. Fictitious expenses
This is perhaps the most distressing type of expense fraud for SME owners and managers, because it rarely happens by accident. Fictitious expense fraud occurs when employees submit fake receipts or make up expenses for services or goods that were never purchased.
This typically happens when there is no clear expense policy, or a lack of enforcement. Employees feel that they can abuse company processes with little chance of being caught.
Examples of fictitious expense fraud
- Submitting altered or fake receipts created using online tools
- Claiming reimbursement for a canceled trip or event
- Faking expenses for hotel stays, flights, or meals that never occurred
- Using vague descriptions and unverified receipts to claim additional costs
Why it’s a problem
It’s a fairly brazen form of theft, for starters. And it shows a clear lack of respect for the company or leadership. If employees will knowingly fabricate claims for cash, how else are they mistreating the business and their colleagues?
Reimbursing fictitious expenses is also a direct loss of revenue, and eats into profit. You’re handing over cash, and getting nothing in return.
How spend management platforms prevent personal expense fraud
You might think you can spot false claims when you see them. But it’s getting easier to digitally alter documents today, and you can’t personally verify every company expense.
Spend management systems have the sophisticated features to do this work for you. They include:
- Digital receipt upload and verification: The software checks that every receipt is legitimate and flags any fake receipts.
- Automated approval workflows: Managers have the chance to check every expense during the submission process and approve them for reimbursement.
- AI fraud detection: Analyzes spending behaviors for suspicious activity and alerts finance teams
Plus, if employees know that every single claim goes through a strict verification process, they’re far less likely to break the rules.
Eliminate expense fraud with simple, effective tools
Fraudulent expense claims can quickly add up and impact your company’s financial health. As your business grows and more employees join, it becomes too hard to monitor every expense claim manually.
Businesses that leverage modern spend management platforms like OFX gain full visibility, automation, and compliance controls to prevent fraud before it becomes a problem. You guarantee that every single claim is carefully verified and approved before reimbursement, but with less work from you and your team.
With real-time tracking, automated approvals, and AI-powered fraud detection, OFX helps businesses maintain financial integrity while allowing employees the flexibility to manage their expenses efficiently.
Eliminate expense fraud and create clean, smooth spend management processes for your business.
This article is purely for informational purposes only and should not be treated as advice. OFX will not be held liable for any losses incurred as a result of individuals or businesses relying on the information contained in this article
