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Expense Padding: The Padding That Hurts

In the world of high profile, business-terminating frauds, expense account frauds are like Rodney Dangerfield - they don’t get a lot of respect. The 2007 survey by the Association of Certified Fraud Examiners entitled “Detecting Occupational Fraud in Canada” indicated the median loss for expense reimbursement fraud was $18,000 but it represented 20% of the total cash disbursement frauds.

David Elzinga,
Grant Thornton
Expense reimbursement fraud can be significant both in terms of dollar value as well as consequences. The recent fraud trial of Canada’s former privacy commissioner, George Radwanski, is an example of this. In another recent case, the president of a division of a large public company was found to have padded his expenses for approximately $300,000 over the course of several years.

Expense account “padding” is defined as adding extra expense items, inflating the value of legitimate expense items or claiming ineligible expense items to obtain unwarranted reimbursements which can be categorized as follows:

Mischaracterized expenses: Employees produce legitimate documentation for non-business related transactions, such as taking a friend to dinner and charging it to the company as “business development.”

Fictitious expenses: Employees submit phony documentation for reimbursement such as producing a fake hotel bill on a home computer.

Altered expenses (usually overstated): Employees inflate the amount of actual expenses and keep the difference such as altering a taxicab receipt.

Multiple reimbursements: Employees copy invoices and resubmit them for payment more than once. Example: copying an airline ticket and claiming the cost again on next month’s expense reimbursement.

Expense reimbursement policies are either reimbursement of actual and reasonable expenses, or a predetermined fixed amount (i.e. per diems or allowances) or a combination of the two. Neither of these forms is perfect nor will they fit all situations so most organizations develop policies which use a combination of both depending on the circumstances.

Meals: Many organizations use per diems to reimburse employees for meals. They are easy to administer, don’t require receipts and are perceived to be less susceptible to abuse. Abuse is, however, still possible if employees claim per diems for days or partial days they are not travelling or for meals that are covered by other means (i.e. conferences, other people paying, etc.). In addition, per diems do not allow for flexibility and may not be appropriate in all circumstances (see Special Circumstances below)

Employees may also be reimbursed for actual and reasonable expenses up to a maximum amount. The expense claim should include an itemized account of the expense (i.e. who, when, where, purpose, amount) as well as the original receipts. The most senior employee at the table should pay for and submit the expense for reimbursement. This simple requirement stops the practice of making junior staff pay for the expense, which is subsequently approved by a senior person who was also in attendance.

Transportation: Transportation expenses do not lend themselves to per diems so they usually take the form of actual and reasonable amounts. Most companies institute a policy regarding the class of air or train travel which is often dictated by the length of travel and/or the seniority of the person involved. To ensure the travel took place and that it was at the appropriate class, some organizations require boarding passes to be included with the expense claim.

In order to avoid the abuse of expense costs some organizations have instituted master accounts with travel agencies. The employees must book their travel with the agency and in compliance with company policies.

For rental automobiles, policy regarding the purchase of additional items such as insurance, prepaid gasoline, GPS, etc. should be considered.

Most companies reimburse expenses for personal vehicles based on an allowance per kilometre. Policies may address distance traveled before reimbursement begins (i.e. outside city limits) as well as employees travelling together where possible. It may still be open to abuse by employees claiming additional kilometers, the allowance when sharing a ride with someone or another form or transportation which has been reimbursed elsewhere. In addition, companies should not exceed the Canada Revenue Agency allowance or employees may be deemed to have received a taxable benefit.

Accommodation: Accommodation usually takes the form of actual and reasonable amounts. As with transportation, many companies have instituted master accounts and/or approved hotels for employees, although this is not always practical or possible. In some circumstances, companies institute policy requiring accommodation to be shared by employees.

Expense account padding with accommodation could entail additional days that are non-business related or movies, telephone, Internet, laundry or minibar.

Special Circumstances: Travel overseas, to isolated/remote locations or travel for extended periods of time will require policies that consider changes to per diems to reflect increased costs, miscellaneous expenses such as laundry, telephone calls, entertainment, etc. and cash advances so that employees are not out of pocket.

In some circumstances, it may be more economical for employees to rent long-term accommodation and purchase groceries. In other situations, employees may decide to stay with friends or relatives while travelling on business and, where appropriate, policy could also be considered to include a per diem for such circumstances.

Company credit cards allow suppliers to make charges directly to the organization and this may aid in the accounting process but will not prevent abuse without appropriate review and approval.

The most important deterrent is the review and approval process which must be built into the policy and followed. This approval process often falls outside the normal purchasing/procurement internal controls and, consequently, it often fails and results in expense account abuse going undetected and uncontrolled.

Managers or supervisors should approve and document the process and be alert to the “red flags” of expense account abuse which include: missing receipts and/or supporting documentation/explanation, photocopies or reproductions submitted rather than originals, altered documentation, unusual purchases or frequency of purchases,
unusual expenses for the person’s position and expenses not being submitted in a timely fashion.

In summary, by all means, trust your employees but verify that trust and give the risk of expense reimbursement fraud the respect it deserves.

David Elzinga, CA, IFA, CFE, is Partner, Specialist Advisory Services, Grant Thornton LLP and can be reached at or (403) 508-1371.

Next Generation of HR
This article is a continuation from the January 2009 edition of MQ


Focusing on the Prize

If we return to the critical talent issues facing organizations today, there are three major areas of focus where HR can make a real difference. While every organization has its own priorities of the day, it is hard to argue that these three are not universally critical to not only our clients, but to Canada’s economy as a whole.

a. Strategic Workforce Planning

This is a key area where HR cannot succeed without the deep involvement of its clients. Clearly, Human Resources must scan internal and external market conditions (e.g. attrition, demographics, retirement eligibility, hot skills), but they alone cannot predict the talent needs of each unit to achieve their objectives. These discussions must be coordinated as part of strategic planning, annual business plans, and on-going discussion amongst the HR Business Partner and their clients. Then, based on these inputs and priorities, HR can facilitate strategic staffing discussions to help identify when and where the organization needs to recruit, train and develop talent to meet future demands.

Steve Ashton
IWK Health
Centre Halifax
b. Talent Management

Business strategy and workforce planning are critical inputs to talent management. They help the organization and HR decide where to invest their time and money each year. The fundamentals rarely change here – most organizations require a performance appraisal process, training programs, performance-based compensation, and recognition programs. The key here is to ensure that they are aligned to the strategy and objectives of the organization, and to fill any critical gaps with new initiatives. In any one year, these new initiatives may include improvements to recruitment programs, a new leadership development program or scarce skill training. Ideally, these investments are cumulative over the years, raising the bar on the talent practices of your organization as you move on.

c. Investing in Education

No discussion about strategic workforce planning and talent management can omit the fact that we can’t generate all of the talent we need internally. We need an influx of new talent as a generation of our workforce looks to retire. So, what are we doing to influence the next generation of talent coming up the ranks?

Whether you are seeking high-tech, accounting or skilled labour, there are not enough graduates coming out to fill your needs. So as organizations, we need to be investing at all four stages of what I call the “Talent Continuum.” This includes:

  • K-12
  • Colleges & Universities
  • Existing Workforce
  • Retirees and Alumni

    Most people understand the importance of college and university recruiting. While we all need to forge tighter relationships here, I want to focus on the K-12 level, as most youth have already made decisions or steered their studies toward a particular profession by the time they reach college. The challenge for us is to help influence and broaden the thinking of our children in grade school.

    Programs like Junior Achievement and Shad Valley are great examples where we can make investments to ensure our kids stay in school and consider opportunities in entrepreneurship, science, technology and engineering. There are similar programs aimed at attracting students to the skilled trades, the arts and social sciences. We have a role in HR to help ensure there is a next generation of talent to enter the fields we most need.

    The second area is re-skilling of the existing workforce. As we shift to a knowledge- and tech-savvy economy, we need to project what skills we will need in the future, and work with our clients to devise a pathway to redeploy talent from areas of low demand to areas of high demand. This includes literacy, numeracy, and technical training, in addition to broader areas of leadership and change management.

    The New HR Competencies

    If we are to succeed in building a new generation of HR practitioners, we need to define and develop the right competencies. Recent research by the Corporate Leadership Council identified the following critical competencies required for HR Professionals as they move up the ladder:

  • Translating organizational goals into specific HR activities
  • Applying business analytics to support decision making
  • Coaching leaders on talent management practices
  • Creating business cases and contributing to organizational decisions
  • Working across organizational boundaries to influence senior executives
  • Generating innovative approaches to enhance organizational results

    CLC’s research also suggested that these skills should be complemented by work experiences including:

  • Experience in an operational environment
  • Experience in cross-functional project teams
  • International rotational experience
  • Leadership experience for local management team
  • HR lead for major reorganization
  • Responsibility for financial management of a business unit

    As we know, HR departments alone cannot ensure that our professionals gain these skills and experience although we clearly need to influence it through educational programs, certifications and mentoring. We also need to ensure our organizations are committed to investing in the career paths of HR professionals and including them in critical business issues, to ensure they understand the business context and can contribute fully to finding the right solutions.

    The business case for organizational investment in the HR function is pretty clear: it will help to attract and retain the best HR talent. Like every other skill set, the best HR talent is in high demand and only those organizations who demonstrate a commitment to investing in their HR teams and its practices will be able to attract and retain this talent.

    A Shared Responsibility

    As stated at the beginning of Part I of this article, it is the best of times and the worst of times for Human Resources. As a person who perpetually views the glass as half-full, I truly believe that our organizations and the HR profession have an enormous opportunity on their hands. While the challenges in our current economy are daunting, they offer the chance for unique and innovative responses to help propel our organizations, communities and Canada to even greater success. But it will take forethought and a strategic investment in proactive human resources practices and partnerships within and across many sectors. If the conversation hasn’t started yet in your organization, your opportunity awaits!

    Steve Ashton
    Vice President, People & Organization Development
    IWK Health Centre
    (902) 470-2617

    IPM – 25 Years and Still Going Strong

    IPM (Institute of Professional Management) is now celebrating its 25th year in the management development and training industry. We express our sincere appreciation to all association members, subscribers, volunteer board members, presenters and participants who have helped our organization grow.

    Nathaly Pinchuk,
    RPR, CMP
    Executive Director,
    How quickly time flies! In the early 80’s, Brian W. Pascal, our Founder and President, was Director of HR at Nortel having started with the firm in Montreal and relocated to Ottawa. In 1983, Brian saw the need for standardizing recruitment practices not only within the organization but in other organizations as well and developed the Professional Recruiter accreditation program. The flagship program was used by Nortel and then delivered in universities across Canada as part of their continuing education programs. As demand for the program increased, Brian left Nortel and launched IPM in 1984 with a small staff. He spent a number of years travelling across the country delivering the Recruiter program as well as others as they were developed. Brian also became more knowledgeable in the field of recruitment and management and was often invited to appear on television and radio as well as to speak to corporate audiences to comment on workplace trends.

    Brian also launched Canada’s first professional association for corporate recruiters for program graduates (now the Association of Professional Recruiters of Canada) in 1984 as well as a publication for members. In order to keep current on workplace trends and legal issues, he developed the Recruiting Today® and Supervision Today® Newsletters which evolved into the HR Today® Journal in 1990. From the original 4-page newsletter to HR Today® to Workplace Today® Journal, a 48-page full colour print magazine, the publication became Canada’s premiere workplace journal. With the growth of the internet and demand for electronic publications, Workplace Today® went online in 2003 and now has over 30,000 subscribers.

    In addition to the Recruiter program, IPM developed the Professional Manager, Professional Assessor and Professional Trainer programs and respective associations. In the early years, IPM offered its members small networking professional development sessions at lunch or after work in Toronto and Ottawa.

    Having joined IPM in 1996, one of my initial tasks was to develop chapters and expand professional development across the country. IPM Associations started with four member advisors and has now grown to a national board of thirty dedicated volunteers. From one association with 100 members in 1984, we now have four associations with over 2,300 senior human resource and management professionals and six chapters across Canada. Our luncheon or after work chapter meetings evolved into half day and full day conferences with attendance averaging between 60 and 120 delegates per event.

    This growth and success would not be possible without the support of our valued members and subscribers over the past 25 years. We also congratulate our Regional Directors, a small group of hard working volunteers who have helped us enhance member benefits, services and events for a number of years.

    The continuing popularity and support for IPM events and publications would not be the same without the outstanding collaboration of our bank of experts. Among the numerous contributors and presenters, you see national legal experts such as Howard Levitt (Lang Michener), Michael Weiler (Lang Michener) and Lynn Harnden (Emond Harnden LLP) who also gave input on the first programs as well as Richard Nixon (Davis LLP) still invited back “by popular demand” to deliver their insights on recent developments. Our audience has greatly benefitted from the insights of these labour and employment law specialists for over 10 years.

    We also appreciate the ongoing support from a group of partners from Grant Thornton LLP who provide valuable information on financial and business management issues both in workshops and in print. Audience feedback confirms that HR and admin managers need this information and we thank financial experts such as David Ray, Philip Gennis, David Elzinga, David Malamed and Mark Wentzell for their continued assistance in expanding our knowledge in these areas.

    Since we’ve come this far, where do we go from here? We continue to update and expand our programs and services. Our new Online Management Encyclopedia is becoming a most popular management reference tool. It provides step-by-step How To’s on many aspects of recruiting, hiring, managing, disciplining and termination. We aim to deliver speakers and presenters on issues relevant to you in HR and management. We would like to see more regional chapters, but cannot do this without sufficient local volunteers to assist. We need more feedback and continued participation at regional and local events.

    Our National Board of Directors and we at IPM National Office thank everyone involved in contributing to our success in the first twenty-five years. We have more plans for the future and appreciate your ongoing support to assist you, our valued clients, in meeting the challenges of the future.

    Nathaly Pinchuk, RPR, CMP
    Executive Director, IPM

    To Bond or Not to Bond

    There is no doubt that in today’s world, businesses and organizations have to protect themselves against a wide range of threats to their information, property and resources. That doesn’t just mean putting up a wall to keep fraudsters and hackers out, it also means ensuring that the organization is protected against employee fraud. To give you an idea of the extent of the problem, it is estimated that the average Canadian organization loses about six percent of its total annual revenue to fraud and abuse committed by its own employees. There’s no doubt that this is a very real problem faced by Canadian employers but a bigger question may be just how far do we have to go in determining our security measures and in measuring the risks posed by individual employees?

    Philip H Gennis,
    LL.B., CIRP,
    Grant Thornton
    Just as the security threats have increased so too have the options to prevent theft of data and assets by those inside and outside of the business. They include information security required under various pieces of privacy legislation, enhanced employee screening, security perimeters and clearances, and bonding of all staff or just ones with particular responsibilities or exposure to sensitive or valuable information. Some companies have taken the blanket approach to this latter point and as a matter of policy are requiring that all current employees be bonded and that all potential employees must be bonded prior to coming on the job.

    Employee bonding can be a valuable tool to help an employer protect itself against wrongful acts by its employees, particularly in industries where employees have direct access to money or to property. But is it really necessary to bond all three hundred employees of an organization, from the senior vice-president to the mail clerks? In addition to the financial cost it may be problematic in a number of other ways as well. It’s possible that some current employees may have things in their past that prevent them from being bondable today. Other potential employees may balk at being asked to be bonded and you could lose otherwise qualified employees to the competition.

    The insurance company that you choose to provide your employee’s bonding will review all aspects of your organization’s operations before issuing a blanket bond to cover all employees. They will also take a close look at your employee list and at a minimum conduct a police check on your staff. If any of them have a criminal record it will show up and may exclude that employee from being bondable today. It may be for an offence that was committed when they were very young and it may have nothing to do with fraud or threaten their reliability but they will not pass the insurer’s litmus test.

    Another area of concern when it comes to bonding is the fact that any employees who have experienced serious financial troubles and who have declared bankruptcy may have difficulty getting bonded. You could have a long term loyal employee who has an excellent attendance and performance record for the past 10 years that had to declare personal bankruptcy because of medical problems and a messy divorce. Are you going to terminate that employee because they went bankrupt years ago? The answer is no, of course, not just because you are a good employer, but also because you cannot use bankruptcy as a reason for terminating employment.

    So if your business or organization is considering moving to bond some or all of your employees to protect the enterprise in case of employee theft or fraud, you should take note of some of these concerns with blanket bonding. You want maximum protection for your organization but do not want to find yourself in a difficult situation with current or potential employees. You also need to consider the fact that most insurers will readily provide a blanket type bond but depending on any difficulties that arise or claims that are made against the bond they may want further investigation and increase your premiums down the road.

    Bonding employees is one tool in management’s arsenal against employee fraud and if implemented properly could provide the protection you need. But Philip Gennis, Vice President, Recovery and Reorganization, Grant Thornton Limited, advises employers to use caution when developing their policies. “Though the aim is to lower the risks, you must be careful to avoid discrimination charges or violation of human rights. You also want to avoid any negative publicity within your community or across the country for the organization itself.”

    To bond or not to bond should be a consideration for all Canadian enterprises. Just be careful that your attempts to provide additional security for the organization don’t actually cause you more time, trouble, and money later on.

    The above information has been provided by Philip H. Gennis, LL.B., CIRP, Vice President, Recovery & Reorganization, Grant Thornton Limited

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