Forensic accounting: Expenses

A booming industry is helping companies track every plane ticket, martini and paper clip. More than ever, a dubious receipt could mean your job.

Over the past 25 years, Bram Lecker, a Toronto labour lawyer who specializes in wrongful dismissal cases, has seen more than a few shattered careers and crushed egos come through his door. But one type of case in particular keeps rearing its head lately: a growing number of employees are being fired for abusing their expense accounts. “You hear about the big cases involving CEOs and public officials, but it’s hitting a whole range of people, not just the Mad Men expense types,” says Lecker. “It’s horrible out there.”

For months now, high-profile expense scandals have dominated the headlines. In late August, Kelly McDougald, the former CEO of Ontario Lottery and Gaming, was fired after senior managers billed taxpayers thousands of dollars for nannies, gym memberships and boozy dinners. In July, Calgarians were outraged to learn several councillors had charged the city for everything from golfing lessons and dry cleaning to Metallica concert tickets and alterations on a Stampede shirt. And we watched as top automotive and banking executives squirmed earlier this year after it was revealed they used government bailout money to fly around in corporate jets and host lavish parties.

But away from the TV cameras and prying eyes of reporters, employees of all stripes are suddenly discovering that a new era of vigilance and parsimony has taken hold in the business world. In just one of Lecker’s recent cases, a former project manager at a tech startup in Toronto was fired without warning after the cash-strapped company took issue with his expenses — he’d racked up $26,000 on his personal credit card paying for equipment and treating employees and contractors to lunch. But employees don’t need to get the axe to realize a huge shift is underway. Natalie, a former regional manager with a large coffee chain, says over the past year employees have routinely been hauled in to explain their expense claims. Stuart, an account manager at a Vancouver Internet marketing company, says travel expenses that would once sail through now get sent back two or even three times, until employees agree to swallow the costs of the offending expenses. Meanwhile, one journalist with a major news organization waged a protracted battle against the bean-counters after expensing a toothbrush while on foreign assignment in a war zone.

If it feels like there are more eyes watching your every move at work, that’s because there are. A booming, multibillion-dollar industry has sprung up to help companies track employee expenses, and workers everywhere are suddenly finding themselves under the microscope. Using sophisticated technology, managers are now able to immediately cross-reference and analyze receipts to hunt down employees who flout company policies or, worse, engage in outright fraud. With these new tools available, consulting firms are eagerly advising companies on how to protect themselves from expense-account wrongdoers. Meanwhile, an army of forensic auditors and accountants is doing brisk business poring over forms line by line, looking for irregularities.

If you haven’t taken those e-mails from the accounting department seriously — the ones advising you to limit your expenses — you should. Everywhere, the rules of the game have changed, and for workers, that boils down to one thing. That company credit card, your cherished ally on lonely business trips and lunches with colleagues and clients, could be the thing most likely to get you fired. “Early in my career, whenever we’d fire an employee for any particular cause, one of the first things I’d look for was expense account abuse,” says Howard Levitt, an employment lawyer with Lang Michener in Toronto. “It’s so easy to find if you look for it, and now it’s easier than ever before.”

And of course, companies are looking for trouble, and they’re finding it everywhere. If there were a prize for outlandish expense claims, bankers at Deutsche Bank in Germany would be high on the nomination list. Last year, the company was forced to issue a memo to employees telling them to stop expensing their visits to brothels. “In the good old days, you could pass off a trip to a knocking shop as a restaurant if the name wasn’t too obvious,” one dismayed banker said at the time. “But we’re in an uptight, locked-down new puritanism now.” At least he could be thankful no one lost their jobs. When Tas Sinadinos, an executive at a railway in Sydney, Australia, claimed more than $10,000 related to escort services as a business expense in 2007, he was quickly fired. In a wrongful-dismissal suit, he said the company had transferred him to Melbourne, so “hiring a woman to keep him company at night was part of his relocation expenses, similar to buying furniture for his apartment.” A judge disagreed and threw out his lawsuit.

Such cases may strain the limits of credulity, but chances are if you have an expense account, there’s a little dirt and fudge in there somewhere. When surveyed, as many as one-quarter of employees typically admit to submitting expenses that don’t meet company policies, and those are just the ones who fess up. What’s more, the number of workers with access to an expense account today is much higher than a generation ago, as the job market shifts more toward white-collar work, creating even more opportunities for expense abuse. All that padding quickly adds up. According to the Association of Certified Fraud Examiners, expense account abuse made up about 13% of all occupational fraud cases in the U.S. last year. And though companies lose far more in dollar terms from other types of crimes, such as financial misstatements and corruption, expense account fraud still costs employers billions of dollars a year.

With the potential for such staggering losses, no wonder an industry of expense-account snoops has taken root. And they’ve got their sites trained squarely on your lunch tab. “Companies are asking, ‘How do we make sure that we never end up on the front cover of magazines as a story of excess?’” says Rajeev Singh, the co-founder and chief operating officer of Concur Technologies, a major player in the emerging field.

Hard and fast numbers on the size of the expense-account surveillance market are hard to come by, but a recent report by Gartner, a technology research firm, determined that last year companies spent $13.5 billion on all types of security software, with those that monitor employees growing at the fastest rate. But tracking Concur’s phenomenal growth can help give some idea of the surging demand for such services. Fifteen years ago, the company was little more than two guys working out of a basement in the Seattle suburb of Redmond, Wash. Today, Concur counts 10,000 corporate clients, 130 of which are in Canada. It boasts revenues of US$215 million and is one of the world’s largest suppliers of advanced systems for arranging corporate travel and tracking employee expenses. And Concur is far from alone. The sector has attracted giants such as American Express and Microsoft. Last month, BMO Spend & Payment Solutions, a division of Bank of Montreal, signed an agreement with CyberShift, an expense automation firm, to expand its offering. The pitch is almost always the same: we can make it easier for employees to book travel, and cut down on the time and money spent preprocessing claims. But most importantly, we’ll make sure there’s no more tomfoolery on the company dime. As Concur says in its promotional brochure, “Opportunities for travel and expense fraud abound.”

Singh has seen employees try to sneak through some bizarre expense claims over the years. One executive was caught trying to claim a flat-screen TV for his home, arguing that it would be used for video conference calls. Another attempted to expense the cost of his daughter’s wedding, since clients had been invited as guests. One even tried to charge through a massive Humvee truck.

The strength of expense-monitoring systems lies in the massive amount of data that can now be instantly gathered when employees are on the road — what you eat, where you sleep, and how you spend every company dollar. For one thing, Concur is networked into the back offices of major airlines, hotel chains and car rental agencies. So if you try to sneak in an upgrade to your hotel room beyond what was originally authorized, or fail to show up for a flight yet still claim it as an expense, a red flag will immediately zip back to your boss. That’s why so many companies now demand employees book business travel only through an authorized website. It’s because they know you’ll leave a trail of digital bread crumbs everywhere you go.

At the same time, Concur’s software uses advanced forensic auditing tactics to comb through months and even years of expense reports for incriminating evidence. For instance, say a company requires receipts only for business lunches in excess of $75. If an employee regularly submits meal expenses for between $70 and $74, it will get flagged. “If a certain number shows up too many times in a person’s expense report, it’s likely they’re making that number up,” says Singh. It all comes down to statistical patterns. “It’s hard to get away with this stuff today,” he says. “The sources of data being followed electronically by companies like ours make it very difficult for you to get away with these types of activities anymore.”

For a long time, companies appeared willing to look the other way when it came to the lowly expense account. That was partly due to the difficulty of sifting through reams of paper filings and receipts to spot that extra bottle of Pinot Noir on the restaurant tab, or the clandestine upgrade to business class. “Prior to the age of computers, it was a very labour-intensive process, because you really did have to enter everything by hand,” says Stephen McIntyre, a former fraud investigator with the Toronto Police Service and now president of MG Forensics who is in the midst of an expense-account investigation for a major client. At large corporations, paper-based expenses might easily take half a year to make their way to the accounting department.

But it was also a different era entirely. It’s easy to forget just how dramatically the relationship between companies and employees has changed over the past three decades. Who could imagine a research paper like the one published in Psychology Today in the early ’70s, entitled “A Little Larceny Can Do a Lot for Employee Morale,” appearing today? “Theft serves as a safety valve for employee frustration,” the author, an industrial psychologist, argued. “It permits management to avoid the responsibility and the cost of job enrichment or salary increases at a relatively low amount of money per man.” In other words, let workers skim a little extra off the top, and they’ll be happier and more productive for the company.

So much for that. If the three-martini lunch was dead and gone by the time this decade rolled around, a deluge of massive accounting scandals put the idea of the lavish expense account on the operating table. Many of the biggest scandals in recent years have begun with investigations into executive perks and spiralled from there. In the case of Dennis Kozlowski, the former CEO of industrial giant Tyco, investors were stunned to learn in 2002 he’d had the company pick up the tab for his multimillion-dollar homes in Florida and New York, more than $10 million in antiques and furnishings, a $1-million birthday party for his wife (complete with an ice statue that urinated high-end Russian vodka) and, to top it all off, $6,000 shower curtains. By 2005, he was serving a 25-year prison sentence.

It was a similar story with Conrad Black, the disgraced press baron. Critics had long questioned the accounting practices at Hollinger and Hollinger International, but it took a 500-page investigative report by Richard Breeden, a former SEC chief appointed special monitor of Hollinger, to galvanize shareholder opposition against Black. In lurid detail, Breeden claimed Black operated a “corporate kleptocracy,” living a lavish lifestyle on the company’s dime. He allegedly billed Hollinger $24,950 for “summer drinks,” $90,000 to refurbish his Rolls-Royce, and many thousands more for exercise equipment, leather purses, and silverware for his corporate jet. The vast majority of Breeden’s most egregious claims never made it to trial, but the damage was done. Black was convicted and sentenced to six years in prison.

The financial crisis and current recession have only made mistrust of expense accounts more extreme. Not surprisingly, we’re seeing most of the fallout in the public sector, where civil servants and politicians are increasingly being required to open up their expenses to scrutiny. That was on full display across the pond this year, when a massive scandal erupted over the opulence of British MP’s expenses. The lavish claims shocked Britons, already struggling through their worst recession in decades. Jacqui Smith, a Labour MP, claimed more than $200,000 over six years on her sister’s London home, not to mention submitting expenses for at least two Internet porno rentals. And perhaps most famous of all, the aptly named Douglas Hogg, a Conservative MP, billed taxpayers $3,500 to clean out the moat around Kettleburgh Hall, his country estate.

We don’t hear about nearly as many scandals in the corporate world, but that’s only because when employees get fired for fraud, companies aren’t likely to put out a press release announcing it. But with revenues plunging and losses racking up, companies of all sizes are looking for every conceivable place to cut, and perks like the expense account make for easy pickings. (After salaries, the second-largest costs for many companies are those related to business travel, according to Concur.) “We’ve definitely been watching personal expense reports,” says the CFO of a small Calgary tech company. “When friends or spouses have lost jobs, it’s not cool to be blowing hundreds of dollars on a bottle of wine.”

But there’s another, darker reason companies are suddenly interested in what’s going on inside your expense account. “In a lot of cases, if an employer is dismissing someone [for expense account abuse], it might be that they were looking for a reason to get rid of them,” says Rose Keith, an employment lawyer in Vancouver. Earlier this year, she had two cases where employees were fired specifically because of their expenses, something she hasn’t seen before. In one, an employee at a sales and marketing company in Toronto had billed for lunches with co-workers, a practice that had gone on for years. “The expense account can be just the excuse companies needed.”

Whether Kelly McDougald, the former CEO of Ontario’s lottery corporation, was the ringleader of an elaborate campaign to “straight-arm taxpayers,” as Premier Dalton McGuinty implied when he fired her, or a scapegoat, as she claimed in her subsequent $9-million suit against the province, will be up to the courts to decide. What is certain is that more and more employees are walking the plank, and bosses seem all too ready to make an example of them to their co-workers.

That became readily clear last fall when a case involving a fired manager with office-supply chain Staples came to light. In 2005, Alan Noonan’s boss sent out an e-mail to 1,500 of his stunned colleagues: “It is with sincere regret that I must inform you of the termination of Alan Noonan’s employment.” Noonan had failed to comply with the company’s expense policy, the memo stated. The underlying message to the Staples employees was obvious: shape up, or you’re out of here, too.

Noonan went on to file a libel suit last year, which he won in February. And while employment lawyers roll their eyes at how McDougald’s and Noonan’s bosses handled their dismissals, experts say companies are slowly learning what it takes to axe an employee for expense-account abuse for good.

The first telltale sign that your company is clamping down will be its sudden devotion to expense policies. Remember those e-mails you get every quarter about expense guidelines, the ones you delete without reading? They’ll usually contain some specific instructions on how much you’re permitted to tip taxi drivers and wait staff, or how much alcohol you may expense during business luncheons. That’s your company laying down the ground rules, says McIntyre at MG Forensics. Ignore them at your own peril. “Companies are creating a tight environment, so if an investigation does come in and take place, they can clearly say to the employee, ‘You knew you couldn’t do this and you did it anyway, so now we’ve got grounds to dismiss you.’”

Yet in Canada, unlike the U.S., expense-account padders at least have one extra layer of protection. In most cases, companies must warn workers explicitly of the error of their ways before they’re fired. Without that protection south of the border, expense-account firings have become an alarmingly common occurrence. This month alone, two U.S. senior executives were dismissed. Rafal Laski, a vice-president with Heifer International, an Arkansas non-profit organization set up to fight world hunger, was fired after an internal investigation uncovered US$34,000 in expense account irregularities. Then, a week later, Dean Akers, CEO of Ideal Image, a national laser hair-removal chain, got his walking papers after the company accused him of expensing a magazine subscription and travel costs related to his family. Akers told a local reporter it was the first time the company had ever brought up the issue of his expense account. “They said I was terminated immediately, with cause,” he said. “It was a complete surprise.”

But even if your boss fires you without warning, and you launch a wrongful-dismissal suit, by then, the damage will have already been done. “It’s a horrible, soul-destroying experience, especially for somebody who was otherwise good at their job and giving 150%,” says Lecker. “Imagine losing your job and reputation over a small mistake or something you didn’t even realize was wrong.”

Lost in the debate over how to crack down on employee expense accounts seems to be any discussion of whether it’s wise to do so. The old adage that you have to spend money to make money has long been the main argument for giving employees freedom to wine-and-dine clients. There’s also the risk that in cracking down on expense accounts, companies may do serious damage to employee morale (for the same reasons industrial psychologists advocated for a little employee larceny in the ’70s). Such a notion comes off as quaint in the midst of the current economic storm, but when a recovery eventually comes, and it will, it once again could bring significant labour shortages and make it hard to hold on to top performers, says Chris MacDonald, a philosophy professor who studies business ethics at Saint Mary’s University. “There’s always going to be some level of oversight,” he says. “The question is how do we institute enough oversight over front-line folks so we can tell shareholders and taxpayers that their money is being spent well, without constantly looking over people’s shoulders and treating them like children or animals?”

For now, that’s something many companies don’t seem concerned with. They’re armed with an arsenal of technological tools, they are determined to slash costs. And when it comes to watching over the company’s tab, one false move and it could be your head on the chopping block.