Administrative Expenses: Whose Alligator Boots are You Buying?

 Post By Emily Hewitt 

In federal court the former vice chairman of ABC-Mart pled guilty to committing fraud for a period that lasted longer than six years. John Smith was convicted of fraud for embezzlement, theft of gift cards and merchandise and unauthorized use of the company’s credit card for personal purchases. How can we and ABC-Mart learn from this nightmare?

Mr. Smith was allegedly involved in creating dummy vendors and invoices and coercing subordinates to approve expenses without support. He would forward a receipt to an employee to create a counterfeit invoice from a dummy vendor. Though appearing to be legitimate administrative expenses of the superstore, these purchases were for; alligator boots (invoice created stated 5 boots for shoe samples), hunting trips, a dog fence (invoice stated travel and entertainment), hunting gear (recorded as “stuff for the union people”) and lease payments for a lodge (invoice was for facilities for meeting, mileage and meals).

How did this activity go unnoticed for such a long period of time at one of the largest superstores in the country? And more importantly, how do we proactively keep our organizations and businesses safe from fraudulent and overstated administrative expenses?

The answer: implementing and monitoring effective internal controls over administrative expenses.

For many of us, monitoring every expense that an employee or executive submits may seem like an impossible task. However, internal controls can be strategically implemented to minimize this risk in an effective and efficient manner.

Some of the controls used to protect against administrative expense fraud include (but are not limited to):

  • Segregate responsibilities for expense approval and processing.
  • Confirm the legitimacy of all new vendors and check invoices against a vendor master file.
  • Compare expense disbursements to the contracts or agreements.
  • Place one or two (if possible) authorized officers or managers in charge of reviewing and approving expenses.
  • Top level management expenses are approved by the CEO or another authorized executive.
  • There is a whistleblower policy in place.
  • Review administrative expenses, to confirm they are in accordance with the expense policy.

Unfortunately, there isn’t a fool proof way to protect your organization from fraud or error in your administrative expenses, especially given the increasing complexity and changing technology your organization is facing. However, by constructing and implementing internal controls over expenses and disbursements, we can decrease the chances of fraud occurring and increase the likelihood of early detection. Challenge your team, at all levels (employees, management, governance), to continuously evaluate the control environment of your organization for improvement, empowering them to communicate their ideas, and make changes to further the integrity of your administrative expense processes.

As for ABC- Mart, the superstore has improved their internal controls over executive reimbursements by implementing a policy; the CEO now reviews and approves all expenses submitted by executives.

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