ABC is a nonprofit organization, incorporated and located in the United States. As part of ABC’s charitable mission, several times a year they conduct large special events both in the U.S. and abroad. In order to produce these events, many ABC employees travel extensively utilizing their corporate credit cards for expenses.
During Gelman, Rosenberg & Freedman’s consideration of ABC’s internal control environment for audit planning purposes, control processes in several areas were reviewed to evaluate whether sufficient controls are in place and functioning effectively. Through inquiry, observation and inspection, an understanding of ABC’s internal control was obtained which was sufficient to assess the risks of material misstatement in the financial statements. Based on the magnitude of the transactions incurred via corporate credit cards, a test of controls over corporate credit cards was warranted.
These tests included selecting a sample of monthly credit card statements and tracing charges incurred by various employees to supporting documentation to verify that the controls were in place and operating effectively. Based on the results not only were the internal controls over corporate credit card transactions perceived as unreliable but it seemed that misappropriation of ABC’s assets and/or fraud had occurred. Initially, the fraud was limited to submitting personal expenses as business expenses; using tear-off receipts in support of expenses (a $15 lunch just became a $65 dinner); misclassifying expenses; duplicate submission of invoices, bills and receipts; falsely completed and/or altered receipts.
The height of the scheme occurred when ABC began to hold its larger events around the country and especially abroad. Payments for conference centers, banquet halls, food and beverage, blocks of rooms, airline tickets, etc. were made by the Chief Financial Officer with the credit card. It was justified as “the easiest, fastest, and safest” method to pay for these services. Because the card maintained by the Chief Financial Officer had no maximum limit, no one ever questioned the large purchases made, which during one year exceeded $248k. Most of these charges were indeed business-related. However, the Chief Financial Officer earned reward points and bonuses from the credit card company for these large charges. It was estimated that during this five-year period, the Chief Financial Officer used reward points for personal benefit worth approximately $40k.
Gelman, Rosenberg & Freedman recommended that ABC set up a process to scrutinize receipts relating to the purpose, itinerary or whereabouts of the reporting individual. Gelman, Rosenberg & Freedman also explained to the client that reviewing credit card charges/expense reports means more than checking for receipts. It involves ensuring the appropriateness and reasonability of the expense. Also, it involves keeping up-to-date on current schemes. For example, ABC was made aware of several websites and blogs that discuss the schemes to get false expenses past employers, including tools and technologies that create fake receipts. Gelman, Rosenberg & Freedman made sure that the client understood that it is important to communicate policies and procedures and provide appropriate training, ask questions and investigate where appropriate.
Violations of company policies should not go unnoticed or unaddressed. If offenders are allowed to escape without consequences, others are likely to follow, as the expectation is that they will come out unscathed.
Most importantly, GRF advised that it is essential to set the appropriate tone for all staff and management. If the policy is perceived to be fair to all employees, employees are less likely to try to take advantage of the system. Decide what the organization will tolerate and stick to it.