I think that you would agree with me that although Travel and expense (T&E) spend is not a major contributor to the total spend, it needs lot of attention and resources to process the expense reports for employees. This includes defining a Travel & Expense (T&E) policy, processing receipts, ensuring that receipts match the expense, auditing, reimbursing employees for out of pocket expenses.

The percentage of T&E expense as of total spend may vary from company to company, but this is always a top of the mind issue for most executives because well controlled T&E expenses can not only save company money but also prevents any fraud by employees and misuse of company assets. As per research done by Aberdeen group, 43% of best in class companies consider T&E expense management as critical strategy and 48% of best in class companies cite “need to reduce expense processing costs” as a top pressure.

Companies whether large or small realize the potential benefits of well managed T&E spend and invest in tools and technologies to better manage the process. However, policy generally comes after implementing the tool and that causes lot of headaches for employees as well accounts payables who is processing those expense reports.

Following Travel and expense policy best practices, companies should first define and implement a policy, ensure that employee feedback is incorporated in the policy and then look at implementing a tool to automate the expense management process. This will not just lead to process efficiencies but also leads to a friction free T&E expense reimbursement process. Let’s look at some of the key components of the T&E policy

Objective of the T&E policy

It is important to have a well-defined T&E expense policy but equally important is to clearly articulate the objective of the policy both for the management as well employees. Some of the key objectives for the T&E policy are as follows

a) Define an expense reimbursement process for both employees and non-employees. The process includes how to report expense, what to include and how employees be reimbursed for expenses.

b) Ensure that employees understand the legal requirements from IRS regarding expenses, for example the need for business reason. Companies who explain the need for policies have a better compliance rate as compared to companies who just implement policies without first explaining the need. You can find guidelines on IRS website.

c) Ensure that employees and their managers understand their duties and responsibilities regarding expenses.

The goal of defining the objective of the policy is not just to define the rules for T&E expenses but to also ensure that employees clearly understand how to behave responsibly while spending company money. A well-defined and communicated policy leads to lower fraud rate and overall reduced spend.

Benefits of Travel and Expense (T&E) Policy

Having a well-defined Travel and Expense (T&E) Policy can have many benefits. Organizations across the board are looking for way to improve their T&E process and having a solid foundation in the form of a policy is the first step. As per Aberdeen research group, the top benefit companies are looking for is reduce expense processing cost.Apart from the obvious benefits of reducing the cost for processing, other benefits of a well-defined policy include 

a) Improved Productivity

Having a standardized T&E policy provides employees clarity on what they should or shouldn’t do, which means the policy administrators are handling less calls from employees on how to do something. It is important to define the policy as early as possible, even if you are a small company. That way, you can tweak the policy as per employee’s feedback and when your company is in growth mode, it is easy to scale the policy across new employees and different locations.

b) Fraud prevention

Having just a policy doesn’t lead to fraud prevention but the visibility backed by a strong process does. What I mean by this is, since you have defined a process to report spend, it will be easier for you to understand the trends and identify if an employee is misusing company assets. For example, if an employee is traveling to the same location again and again, you might want to audit that to check if this is a valid business need for that or the employees have relatives at that location! 

c) Cost savings

Though cost savings is not the only reason for which you should define a T&E policy, having a well-defined Travel and Expense policy does lead to cost savings. Specifically,

• It helps you to understand key trends by way of gathering spend data (assuming you have an electronic system to capture T&E spend including vendor details). Once you have data about key vendors, you can go back and negotiate the cost with these vendors. On an average, you can reduce your T&E cost by 8-10% across airlines and hotels once you have a decent volume.
• Standardization leads to reduced exceptions and hence overall reduced cost to process an expense report. As per research from The Aberdeen Group, the average cost to process a single expense report is $20.65 and for organizations with visibility, the average cost is $12.51, or 39% lower. So, if you are a mid-market company processing 1,000 expense reports per month, that’s an approximate annual savings of $97,680.

Component of Travel and Expense (T&E) Policy

This section is more an overview then detailed explanation of each component of the T&E policy, use this as a template to create a T&E policy which is customized to your organization needs

1. Expense categories

The first step is to define what spend categories are covered under the corporate Travel and Expense policy and what special rules you might have for these categories. Common expense categories are

1. Travel – Air, Road, Lodging, car rentals.
2. Business meals
3. Client entertainment expenses
4. Office expenses – for example office supplies which employees can purchase using corporate card or their own card.
5. Other vendor expenses – expenses you allow

2. Cards vs cash

It should be clearly defined whether employees should exclusively use corporate issued credit cards or whether an employee can use their personal credit card and cash for employee expenses. There are pros and cons of each approach, so you should clearly evaluate the alternatives and decide what works best for you. For example, if you are exclusively using cards, then that gives you better visibility into T&E spend but then you are liable for paying late fees if employees don’t file expenses on time.

3. Reimbursable vs non-reimbursable expense

Not all expenses are reimbursable, IRS guidelines drive some of that and as a company you might decide not to reimburse such expenses. Some common non-reimbursable categories include

1. Child care
2. Personal grooming
3. Dry cleaning services – some companies do reimburse this expense and some don’t and this is dependent on the average number of travel days for your employees.
4. Parking tickets
5. Traffic violations tickets
6. Airline upgrades.

It is recommended that you review your overall T&E spend and identify categories which are not reimbursable. The list of categories generally evolves over time so you don’t need to capture everything on day one.

4. Expense reporting and reimbursement

 The T&E policy should have a clearly defined process for reporting the expense and the pre-requisites for submitting the expenses. Some of the common examples are

1. Reporting of the expense reports: if you are using an expense management tool then this process is straight forward but if not, then clearly define how and to whom expenses should be submitted after they are approved.
2. All expenses should be approved at the right authorization level before submitting for processing. The right level depends on the autonomy available to employees at each level of the organization hierarchy.
3. It is a good practice to have receipts for everything but that also requires additional effort to validate those receipts and match it against receipts. You might want to start with a lower amount, for example anything greater than $20 needs a receipt.
4. All T&E expense reports should be reported within a certain timeframe. If your company has a corporate credit card program, then you might require all expense to be filed within 30 days so that you can pay the bank in time and avoid any late fees charges.
5. How soon employees expense will be reimbursed, for example 30 days after the expense is reported.

5. Travel policy

This is the most important piece of the T&E policy. As per financial dictionary, “travel expenses are defined as Expenses incurred when a person conducts business away from home. For example, if one must travel to another location to conduct a meeting with an important client, any lodging, meals, or transportation costs usually count as travel expenses”.

Following should be covered in the travel policy

a) Travel booking:  How the travel should be booked by employees. There are multiple options available including external or internal help desk, travel booking tools or other travel websites like Expedia, individual airlines sites etc. There are pros and cons of each of these approaches but you rather have a defined approach. If you are a medium sized business, it is ok for employees to use any website for booking, however in that case, make sure that you have a good expense reporting tool so that you can get visibility into spend.

b) Preferred airlines:  If you have a preferred contract with any airlines then make sure that you communicate that to employees. If your annual spend is under $500,000 chances are that you might not be able to get any preferred pricing from airlines but you can always enroll in the corporate miles program whereby company accumulates miles for every travel. These miles can then later be redeemed for travel, not huge savings but you can save $50,000 – $100,000 / year depending upon how they are redeemed.

You should also specify if travelers need to book travel in advance or they can book anytime. As per research done by travel booking site cheapair.com the best time to book a domestic flight is 49 days in advance. Now that might not be possible all the time, as per the research, the worst day to book a ticket is one day before the flight, followed by 2 days, 3 days until you get to 11 days out. So, if you can’t do 49 days/ 7 weeks, aim for at least 2 weeks.

c) Business Class vs Economy: The policy should clearly specify when business class travel is allowed. There are multiple ways to structure this, you can implement policy based on job titles, for example – VP and above can travel by business class. The other way to handle this is to structure by travel time, for example – if the travel time is more than 8 hours then business class is allowed. You can decide to keep it simple by not allowing business class travel at all!

d) Lodging: There are couple of things to cover here, first what type of rooms can be booked by travelers, for example standard vs. suite etc. Second, if you have a preferred contract with a hotel, then make sure employees use only that hotel. The problem with hotel bookings is that employees prefer to book hotels with those hotel chains where they already have lot of reward points. This can easily be mitigated by asking your preferred hotel to do a reward/points match. Some hotel chains might not negotiate a national contract so this could be a little bit of work depending upon the number of locations travelled by your employees.

e) Booking cost and exceptions: The goal of this section should be to provide guidelines to employees on acceptable booking cost for airlines, lodging and car rentals. If the booking cost is over the guidelines, then a process should be in place to approve those exceptions.

BTN (Business travel news) publish a yearly BTN corporate travel index  which is a good start to get a handle on the overall travel cost. For example – as per the 2017 index “the average 2016 cost of a hotel room, including all taxes and surcharges, was $177.36, up 2.6 percent from 2015 levels. New York was the most expensive at $385.08, and San Francisco, Boston and Washington, D.C., also exceeded $300.”

Best practices –  Travel and Expense (T&E) Policy

Defining a policy is one thing, implementing it in a user-friendly manner is a completely different ball game, we will conclude this guide by mentioning some best practices which you can use to successfully implement a Travel and Expense policy in your company

1.Ownership of the policy

For the T&E policy to be successfully implemented, there must be a clear defined ownership of the policy. Ideally this should be owned by a finance function or a procurement function. There are two main reason for defining a clear ownership, first – your policy is not going to be perfect on day one so having a clear ownership ensures that someone is tracking the policy adoption and accordingly making changes. Second – when you rollout the policy, there are always questions from employees, so you need someone to handle employee questions and feedback.

2. Executive support

 T&E policy implementation is no different from any other change initiative and if you have key executives backing up the policy, there is a higher chance of adoption. In our experience, the T&E policy is well adopted in cases where a senior executive like CFO (Chief Financial Executive) is supporting the policy. It is good practice for the initial communication to go from CFO on why the need for T&E policy and how employees can provide feedback.

3. Focus on Adoption

 It is not uncommon to see employees going out of the policy and booking travel which is not authorized or travel which is outside the guidelines. The most common reaction to such employee behavior is to act against such employees and set a precedence. Our recommendation is to resist this temptation and focus on rather accommodating the needs of the employees. Understand why the exception handled and if it is a genuine request then figure out a way to accommodate that in the policy. Focus on adoption and not enforcement only, once you have policy fully adopted, you don’t need to enforce it!

4. Keep it Simple

 While writing the policy, use simple language and avoid corporate jargons. There are two benefits of that, first – all employees can easily understand what is expected out of them and second – there will less exceptions because the expectations from employees are clearly define. Policies in general are not well read by employees, I mean who wants to read a 20+ pager document to understand how they should travel. For higher adoption, keep it simple and brief and define as less rules as possible. Again, focus on adoption first.

5. Reporting

 Make sure you have a mechanism to report on the total spend at department level and at company level. There are multiple benefits to having good reporting around T&E spend

1. It helps budget owners to better understand how their T&E budget is consumed.
2. It helps understand spend patterns and any transactions which might be fraudulent in nature.
3. It makes people accountable because their spending is now reported and available to senior management for review.

Conclusion

When it comes to defining Travel and Expense policy, define clear objectives and goals you want to achieve, keep it simple and focus on adoption over enforcement. Hope you find this guide helpful, you can check more topics around procurement in mid –market companies on ProcureDesk blog.

If you look at progression of any company from startup stage to a well-established company, there is a common theme on how the procurement process evolves over time. Preventing procurement fraud is not a priority for most of the small to mid-size companies, let’s look at the evolution of the company and when preventing procurement fraud should become a priority.

Procurement Fraud and Company Size

Stage 1:  In the beginning, there is the founding team and 1-2 more people. There is no to limited procurement, especially if you are a services company. Procurement is synonym to owners of the company going to Costco or Sam’s Club and purchasing all what they need to run the business. Very limited procurement, owners controlling all purchases, no possibility of procurement fraud.

Stage2:  In this stage, a Company typically have under 50 employees, procurement now involves buying office supplies, capital equipment, IT hardware and software and other maintenance supplies. Most of the companies have generally a office manager responsible for purchasing all items company needs. Purchasing is simple generally sending an email to the office manager and she takes care of purchasing them and the whole process including paying the vendors using company credit card.

Stage 3: In this stage, the Company is in growth mode, you are hiring as fast as you can and opening new offices. You probably have an accounting/ERP system at this time to handle your books and handling other business processes like creating sales orders, managing customer billing and paying vendors.

• The focus in this stage is primarily hiring more sales and marketing staff, expanding production capabilities.
• Most of your employees have credit cards which they use for small purchases, meals ,travel & expenses. This requires you to have a person in accounting to match receipts to the purchases and ensuring that there is no misuse of the card.
• You probably have grown to multiple locations.

If you are a CFO/COO or CEO of a company which is in stage 3, you should be thinking about procurement fraud. I am not saying that you should not trust your employees but you should be considering implementing measures to prevent procurement fraud.

What is Procurement Fraud

Let’s first define what is procurement fraud. As per Wikipedia –“Procurement fraud can be defined as dishonestly obtaining an advantage, avoiding an obligation or causing a loss to public property or various means during procurement process by public servants, contractors or any other person involved in the procurement.”

It is simpler words, it is a kickback to the buyer from supplier for selecting the buyer’s bid and which might not be in the best interest of the company. The scope of procurement fraud is not limited to certain categories or companies but it is a wide spread issue.

As per consulting firm PricewaterhouseCoopers Global economic survey 2014 twenty nine percent (29%) of global organizations had experienced procurement fraud. Procurement fraud is common in the beginning of the procurement process (vendor selection stage) then the later stages like vendor performance and delivery.

Fraud Triangle

Why fraud happens? There could be multiple reasons but any action of fraud can be captured by these three tenants of fraud. As per ACFE (Associations of Certified Fraud Examiners) , the fraud triangle consists of

1. Perceived financial need: This is the motivation or the reason behind the fraud. Examples include – Financial Debt, gambling or other short term needs which an individual is not able to fulfill with the current income source.

2. Perceived opportunity: The second side of any fraud is an opportunity for someone to commit fraud. For example, if the person committing the fraud understand the controls well or lack of controls in the purchasing process, they can easily identify opportunities for committing fraud.

3. Rationalization: This stage involves the individual planning to commit the fraud rationalize his or her actions. For example, the amount is so small that it will not affect the organization or no one will notice such a small change. Others rationalize by relating to the situation they are in and rationalizing in their mind that the situation is temporary and the fraud is one time and will never happen again. I think you can say the same for gamblers, it always start with a small bet.

Examples of Procurement Fraud

Following are some of the common examples of procurement fraud

1. Employees colluding with suppliers: As per cporising.com, this is the most common example of a procurement fraud. In this case, employees responsible for purchasing a product or service colludes with a supplier to purchase a product at a higher cost or a cheaper product which doesn’t meet the quality requirements. In return, the buyer receives a kick back. It is very common especially in companies where there is no well-defined sourcing process or the procurement is decentralized to the individual location or departments. The impact of such procurement fraud could be limited in certain locations; but it could have a devastating impact on your product reputation if you land up buying inferior raw materials which leads to a poor-quality product for your customers.

2. Fraudulent companies’ setup by employees: Though this is not the most common example of procurement fraud but this might cost you the most. In this type of fraud, few employees may collude to form a fraudulent company and then keep on issuing payment in the name of that company. The payments are generally small enough that it doesn’t raise any alarm but over a period of time this can cause serious damage to your company. There are multiple reason this could happen – first, the company doesn’t have a purchase order process so they don’t match invoices against purchase orders before the payment, second if an individual manages the entire process from purchase to payment then it is easy for that individual to commit such fraud.

3. Conflict of interest: Even if you have tighter controls and well defined processes, chances are that fraud can happen in the form of conflict of interest. You would often see this even in companies with well-established processes. The individual responsible for purchasing select a vendor who is related to him/her in some fashion. There is nothing wrong with that if you have conducted a bid process, the selected supplier meet all your qualification criteria and the individual responsible for purchasing have declared the conflict of interest. Unfortunately, that is not always the case.

 Procurement fraud impacts your procurement process integrity. But the reverse of this is also true, which means if your sales team is colluding with buyers of your customers and giving kick back to buyers. In 2010, HP paid $55 M to settle allegations that it paid money to individuals to win US government contracts. So, you should be looking at preventing procurement fraud but also looking at how not to engage in such practices with your customers.

How to prevent Procurement Fraud

 There are multiple ways to prevent fraud, some are basics common sense approach and some needs investments in system and processes from companies to detect and prevent fraud.

1.Educating Employees and Suppliers: The first and foremost step towards procurement fraud prevention is education of employees about your procurement practices including your bid process, how you select vendors, conflict of interest etc. The same is true for your suppliers, create a supplier code of conduct and ensure that suppliers have read and acknowledged it. It is not a full proof process but it will at-least inform employees of what is expected and what are the consequences including termination, that should take prevent conflict of interest cases.

2.Controls and audit: Having proper controls helps in prevention of procurement fraud. Following are some examples of purchasing controls you should have in place.

• All purchase requisitions should be authorized and approved by the authorized individual in the organization. Based on the transaction amount, the approval should come from different individuals. For example, a manager can approve only up to $5,000, Sr. Manager can approve up to $10,000 etc.
• All invoices should have a pre-authorized purchase order, if that is not in place proper investigation should be done to understand the gaps in the process and how to fill those gaps.
• For purchases, which are happening through credit cards, a valid receipt and justification is required to approve expense, including a proper business approval.

However, just having controls doesn’t prevent procurement fraud but you also need to have an internal audit department auditing purchases on a regular basis. Audit department should be randomly select purchasing transactions and ensuring that there are no gaps in implementation of the control.

If you are like many mid-market companies, you probably don’t have the luxury of an audit department, if that is the case, focus on automating the controls as much as possible so that you minimize the chances of procurement fraud, we will talk about procurement control automation in a later section.

3. Segregation of duty: Ensure that duties are segregated and that the same individual doesn’t have control over the entire purchasing process. In others words, a single individual shouldn’t be able to create purchase orders, key in invoices and issue payments. Even if you have tighter controls, segregation of duty minimizes the chances of procurement fraud. An ideal case is that there are two different departments handling purchase orders and invoices, procurement department managing purchase order process and accounts payable managing invoice capture and issuing payment. If you don’t have dedicated resources, employees requesting purchases can handle issuing purchase orders directly but Accounts payable can only handle invoices.

4. Be Watchful: I am not suggesting that you have full time investigator watching every action of your employees but being watchful of changes in lifestyle, extravagant personal spending of people responsible for purchasing could be a sign that something is not right or they hit a jackpot and in that case they might not need the job after all!

Ricky D. Sluder a certified fraud examiner offers a useful tip about reviewing social media accounts, for example if a procurement officer making $60,000 a year posts picture of extravagant purchases on social media, that should be a sign that something is not right.

5. Automations of control: Automation not only helps with productivity improvements; it also helps with fraud prevention. Automated purchasing systems have many benefits but from a procurement fraud perspective, it can offer the following benefits

• Electronic system for creating purchase orders and ensuring all orders are approved at the right authorization levels.
• Ability for end users to create a receipt for purchases so that there is a proof that the item was purchased and this is not a fraudulent purchase order.
• Automatically matching a purchase order with receipt and invoice (also called 3 way match) ensuring that you are paying for the same items which were purchased and delivered.
• Complete visibility into spend, the data is at one place and any decent purchasing system can run reports and provide historical purchasing information.

Conclusion

When it comes to procurement fraud, the best step forward is to put together preventive controls which can prevent the procurement fraud from happening. As the adage goes “Prevention is better than cure”.

Some of you might say that we are small enough to have any kind of fraud, but it is easier to implement basic controls when your organization is small vs when your organization has grown up to 100 of employees and multiple locations. Also, keep in mind that that you don’t over burden your employees with lot of control, implement sufficient but lean controls. Automated purchasing systems can help in simplifying the implementation of such controls and provides better spend visibility.