How to Navigate Complex Expense Reporting and Auditing Problems

A June 2015 report from the Aberdeen Group reported that companies with best-in-class Time & Expense software “require 43% less time to fill out an expense report” and automated expense reports speed up approval time by 265% (from 9.3 days to 3.5 days). This marked improvement demonstrates the value of automation.

However, those statistics also show that while the manual workload is reduced for end users and approvers, the workload is not necessarily reduced for the finance groups and auditors, who also have an essential role to play in the
expense report process. There’s not much talk of tools for those in accounts payable, managers, and auditors looking to
uncover fraud and ensure compliance with company policy.

This whitepaper is designed to serve as a resource for those trying to navigate complex expense reporting and auditing problems. You will learn more about best practices for how to establish an expense reporting process, specific
information on how to deal with particular expense types, policy recommendations, and how the latest in audit innovations solves some of the problems inherent in expense reporting.

In this stage, your process has probably not yet been established and this is where it can look the foggiest. A practical tip is to start by establishing what travel policies you would like for your employees to follow. This need to establish policies might arise because you’re starting a new company or because management has noticed that there are recurring corrections that need to be made within submitted expense reports. Either way, in this section, you’ll find a list of recommendations for specifics concerning the most common types of expenses and a method for implementing those policies.

The following list represents expenses most often utilized and advice for how to manage that particular kind of expense.

Airfare is a very common expense type and it’s one that can be challenging to manage because it can be expensive and difficult to track. Here are a few ways to save using policies:

• Track unused or adjusted pre-paid airfare charges.
• Require users to enter the air ticket number, which is issued upon travel.
• Monitor the class of service being used.
• Monitor baggage and other airfare related fees.
• Monitor spousal travel on business trips.
• Make sure the corporate travel agency was used to book the flight and the pre-approval requests before the flight is actually booked.
• Advance purchase date (a 7-day advance purchase date is recommended).

Most of the airfare ticket data can be read from a back-end booking system, enhanced credit card data, or your company corporate travel agency. That data may include origin, destination, trip date, airline, class of service, ticket number, and passenger name. There is no need to configure a lot of fields to collect the above data, unless the data is not provided from the source to booking.

Car rentals are another expense seen commonly no matter the industry. Here are a few recommended policies for car rentals:

• Validate against fuel charges on car rentals and require explanation.
• Car type/size rented and related allowances.
• Pickup and drop-off location.
• Check for any upgrades and insurance.
• Make sure the preferred car rental is being used.

The data can also be automatically imported into the system, including: vendor, car size, pickup location and return location, pickup date and return date, and whether fuel was purchased as part of the car rental. If you have contract pricing with one or more car rental vendors, they usually provide a data feed in which this data can be auto-loaded and auto-matched to the credit card charges so you can improve your reporting and improve your overall auditing process.

Hotels are a special case because the charges at the end of the stay tend to be on one bill. Those charges can include not only the nightly rate and taxes, but also expenses associated with food, parking, and even laundry among others.

In this case, it’s recommended that the receipt at the end of the stay be required to have itemization. Most credit card vendors offer level 3 data, including the hotel folio, which can auto-itemize charges on the expense report. Having the hotel folio data itemized by expense type will help auditors and approvers get a clear view of the expenses that are part of one charge on the credit card, but might need to be allocated to separate accounts.

Lodging policies to validate specific expense types include:

• Compare against GSA per diem lodging or maximum rates and allocate excess to the unallowable account.
• Laundry charge restrictions if the employee stay is less than a certain number of days.
• Internet charges.
• Long distance phone calls.
• Mini-bar charges per day.

Set limits for daily internet charges to make managing costs simpler. Primarily, it’s advised that you collect provider information along with the following policy:

• Monthly caps by employee.

Mileage on personal cars is a common charge for short distance trips. To make sure you manage mileage reimbursement, we recommend the following:

• Set mileage/kilometer limits with different rates based on the number of miles driven.
• Enable commute mileage calculation.

Commute mileage means that employees do not get mileage reimbursement for the miles that they regularly drive from their home to their regular work location. Instead, employees only receive reimbursement for their mileage from their regular work location to the secondary work location. Using Google Maps is an accurate way of ensuring that only the appropriate kind of miles and the exact number of miles are being used.

Another consideration is the rate at which mileage is reimbursed. The original GSA rate was not designed for longer trips, so a lower rate may apply if employees are traveling more than a certain number of miles per day. In addition, at some point it may be cheaper to rent a car rather than reimburse an employee for mileage. In general, it’s also advised to set the mileage rate based on the number of miles driven per day, week, month, and/or year.

For companies with company cars, you can require employees to track their odometer readings and track trips with multiple destinations and then request that they provide personal mileage on company cars for tax purposes.

Cell phones are a common type of expense, though not many employees within the same company often qualify for this kind of reimbursement. To manage cell phone expenses, it’s advised that you configure monthly allowances by individual employee or group and that you track the carrier information. You can also manage usage of this expense type by restricting access to this expense type and assign it to designated users only.

Meals can be a major expense for any organization that sends employees out to travel. They can be difficult to track, especially when you consider that each employee might expense three separate meals per day. It’s advised to break out meals by breakfast, lunch, and dinner and then to track the location of these meals (whether they’re in town, out of town, or even in the office). Then, it’s advised that you have separate fields to collect data about tips and alcohol. The following policies also make a good addition to employee handbooks:

• Establish meal caps by meal type and validate against GSA per diem rates or specific meal limits by country/city.
• Set caps on the tip as a percentage of the total amount.

Business meals and entertainment expenses can differ from the meals expense type above because they relate to several people rather than to one individual. A best practice is to collect data about the charge location, purpose, type of entertainment, as well as participant names, company, and titles. In addition, some companies might need to track data related to the Sunshine Act, so they will need to require the NPI number for each doctor and the amount allocated to each one.

These policies are also recommended:

• Caps on the amount based on the number of attendees.
• Alcohol and tip amount tracking.
• Track meal expense category duplications in which the attendee is on one business meal and creating an expense report with individual meals on the same day.

Per diems are meant to simplify the expense reporting process. For per diems, information about the location of travel is collected, and depending on whether the expense is associated with single-day or multi-day travel, the rules can differ on how the daily allowance and deduction are calculated. It’s also recommended that a provided meals deduction is taken for breakfast, lunch, and dinner portions in addition to the following policies and methods:

• Validate to make sure lodging expense is claimed on the multiple-day travel if meals are claimed.
• CONUS (Continental United States) and OCONUS (Outside the Continental United States) fixed deduction rates or deductions by percentage.
• Per diem allowance and deduction based on the first and last day of the trip, as well as if there were any actual meals charged on that day such as business meals.

If you’re more comfortable with a higher level of control, a recommended process for streamlining processes and ensuring policy compliance is pre-trip authorization. This might be authorization for a trip, a class, or a conference. This feature allows the company to require authorization of all (or most) expenses before the trip is taken. The employee or traveler submits an estimated expense report, which then goes through the usual approval workflow and business rules.

The details required for this authorization can vary by organization and can even vary by employee type or department. Then, their manager provides approval or rejection of the estimated expense report. Once the trip has been taken, an expense report for actual expenses incurred is submitted and tied to the original estimated expense report.

If you do want your employees to submit a pre-travel or pre-expense report with estimates on their spending, you’ll need to establish a policy and a process for pre-approval authorization, which comes with several advantages and disadvantages.

Advantages:

• More control over budgeting and communication about expenses before they are incurred.
• Ability to clarify questionable expenses in advance rather than after they are charged.

Disadvantages:

• Employees have to complete two expense reports (estimate and actual), slowing the process.
• Potential to miss cheaper expenses, such as flights, due to delays.
• Doubles the work for both employees and approvers who must review two reports.

An essential advantage of pre-trip authorization is not only that the employee is more cognizant of their spending and policies are more closely followed, but also that the estimated and actual expense reports can be compared to see the differences. Information like this is invaluable for staying within budget and identifying employees who might need closer review during the audit stage.

In this step, you’ll need to figure out who will be processing all the expense reports. Deciding who will become an approver is more than figuring out who is in charge of whom. You’ll also need to consider how many levels of approval you need and how to train those approvers.

A best practice is to have at least one level of approval, though two levels is better. For instance, you might have the direct manager become an approver, but then the expense report has to go to the actual accounts payable person to perform a check-up on the report.

Another option is to establish exceptions for particular kinds of expenses or for particular submitters. If a particular kind of policy is being broken, you can arrange for a special check of that policy.

You can also use auto-approval, though it’s recommended to also perform random checks if you choose to use this automated function. With a random check, a human approver will randomly pluck a specific percentage or number of reports to double-check them.

The next stage of the expense report process can be the most rewarding. Compiling, processing, and auditing all that data can seem meaningless without the final analysis on what all of it means. Reports can provide you with the insight you need to make difficult decisions about policies and how to most effectively spend your money. Here are a few recommended reports to run after the audit:

Monthly, quarterly, yearly expense reimbursement tracking by user, by expense or GL account, by department, by project
These minute details can be useful to organizations looking to drill down deeply into costs and expenses. The ability to define what matters to your particular organization without relying on canned reports is particularly valuable.

Corporate credit card transaction reconciliation and usage tracking
This kind of report is also particularly valuable because it allows auditors to see the status of credit card or P-Card transactions. This report can provide information on which employees have not reconciled their transactions and where those transactions are in the process, as well as the kind of transaction (such as whether the transaction was personal versus business). This report provides full visibility into how credit card transactions are being managed.

Measure approval duration by approver (how long a report sits in a manager’s approval queue)
A major aspect of employee satisfaction is how long it takes to get a reimbursement for out-of-pocket expenses. If an expense report sits in the approver’s queue for a long time before being approved or denied, it could indicate one of several possibilities: perhaps the approver has too many other expense reports to manage and the approval flow needs to be readjusted to accommodate a change; expense report approval might not be a priority for the approver because of a high workload (which might also indicate the need for a workflow change); or the approver is not getting notifications of reports or needs additional clarification or training about how to access the reports or how to approve them.

Track audit failures by audit reason
This is a particularly valuable tool. Analyzing which policies are most often failed can help determine which policies need changes. A high rate of failure can indicate that the policy needs more attention. Perhaps the policy is poorly worded or unclear, resulting in confusion among employees. Another possibility is that the policy is unreasonable and cannot be followed—either because the requirements are impossible to meet or because users need to be better informed of the specific requirements through training or re-training.

The following are recommendations for managing your company’s policies to establish a smoother process, find fraud, and improve compliance.

CONDITION-BASED AUDITS

Your auditing software solution should allow you to perform audits based on conditions relevant to your organization. Canned reports are often not helpful because they are not customized to the needs of the company or industry. Instead, being able to run condition-based reports ensures that only the details relevant to your needs are retrieved.

For example, Company A might want to audit reports over $2,000, which for them is a semi-high amount of money to be spent. Company B might regularly have employees who submit expense reports of more than $5,000, making those reports exceptional and worthy of closer inspection.

In another example, Company C might request to run an audit of 10% of all reports for manual inspection—perhaps 10 out of 100. However, 10% might be unreasonable for Company D, which submits 10,000 expense reports per year, resulting in 1,000 reports to review manually.

Other reasons for condition-based audits might vary based on what the company allows employees to submit for reimbursement. Some companies provide a stipend for spousal travel, while others do not reimburse for it at all. This demonstrates that condition-based audits can be based on a wide range of criteria, including:

• Amount
• Expense type
• Vendor
• Employee type
• Type of approval (e.g., single-level vs. multi-level)

Other conditions can also be accommodated within the software.

POLICY REVIEW & ADJUSTMENTS

Having the ability to run audits against specific conditions can empower organizations with the data they need to take action. However, organizations often fail to take the next steps needed to improve their processes and save money. One critical step is identifying which policies are most often failed—and understanding why.

The audit utility can help reveal fail rates, but the next step is diagnosing the cause. Common issues include:

• Too many policies overall
• Poorly written or unclear policies
• Employees misunderstanding the rules or their purpose

Simply rewording policies can dramatically reduce failure rates. Clearer policies help employees know what belongs in an expense report and what doesn’t. Most employees aren’t trying to break the rules—they just need to understand them better.

Creating a habit of annual policy reviews and revisions helps eliminate the root causes behind high audit fail rates. Policies can become outdated or even obstructive to productivity over time. The best practice is to adjust policies continuously as issues arise and ensure a comprehensive review at least once per year.

AUDITING RECOMMENDATIONS

In addition to the above procedures for speeding up the auditing process, here are some recommendations for what you should be auditing against. These are common audits that work well.

AUDIT REPORTS EXCEEDING DEFINED AMOUNT

This amount might vary based on the usual spending patterns of your company. For some organizations, $1,000 might be a good threshold to audit because it represents a significant expense, whereas others might set that threshold at $10,000 or even higher.

AUDIT USERS WITH THE HIGHEST NUMBER OF REJECTIONS

The audit module is an excellent source of data for identifying outliers in rejection rates. Reviewing expense reports from users who experience the most rejections can provide valuable insights—not only into who is going against policy but also into which policies are being violated. This information helps determine whether the policy wording is confusing or unclear, allowing you to correct and clarify the language for employees.

AUDIT POSSIBLE DUPLICATES

Duplicate submissions represent a 200% increase in costs, making it crucial to detect and eliminate them. Duplicate amounts could be accidental or intentional, and auditing for them can yield significant savings.

AUDIT OF RANDOMLY SELECTED SET PERCENTAGE OF REPORTS

Randomly auditing a fixed percentage of reports is a best practice for ensuring system integrity. The percentage can be adjusted depending on the total number of reports in your system—higher for smaller volumes, lower for large ones.

AUDIT 100% OF EXPENSES WITHIN A SPECIFIC DEPARTMENT

If a particular department appears to be spending disproportionately more than others, it’s worth auditing all expenses within that department. This helps uncover spending trends and identify opportunities to reduce costs or improve compliance.

AUDIT A SET OF FIRST FEW REPORTS SUBMITTED BY A NEW EMPLOYEE

New employees may not yet be familiar with company policies and could unintentionally violate them. Reviewing the first 3–5 expense reports from each new employee helps catch errors early, saving time and money by addressing patterns of mistakes before they become recurring issues.

AUDIT REPORTS OUTSIDE TRAVEL POLICY DEFINED BY THE COMPANY

Companies often find value in auditing all failed reports, regardless of the reason. This approach helps identify trends in failure types, which can inform updates during annual policy reviews. The goal isn’t to accommodate failed reports but to use them as learning opportunities—improving clarity, consolidating redundant policies, and strengthening compliance overall.

AUDIT REPORTS WITHOUT RECEIPTS.

One-off situations in which receipts are not submitted can certainly happen. Perhaps a receipt got lost or was never provided in the first place. However, this can represent a major pain point for many businesses. Running this report  can be very helpful in determining whether a recurring problem exists because it can identify patterns. If a particular employee is consistently asking for reimbursement without a receipt, those reports probably require closer scrutiny.

An established system requires maintenance and follow-up to ensure that the right processes are in place and that the system remains functional. It’s recommended to conduct quarterly reviews so that data is gathered and analyzed progressively, rather than becoming overwhelming at the end of the year.

It’s recommended to run reports for the following types of data:

• Policies most often failed: This can help identify which policies are too strict (for example, a $10 per meal limit that’s unrealistic) or which ones are poorly understood by employees.
• Policies that have never failed: These may be unnecessary and could be eliminated. Their requirements might be irrelevant, impossible to trigger, or redundant. This review can also uncover overlapping or outdated policies.
• Frequency of failure: Understanding which policies have moderate failure rates can be valuable. These are likely functioning as intended and should be maintained.
• Top 10 users with the highest failure rates: Identifying who makes the most mistakes allows you to target corrective actions. This may involve providing additional training, clarifying communication, or reviewing specific workflows for improvement.

Quarterly or semi-annual reviews are instrumental in preparing for the next stage of the process: the annual review, where comprehensive policy evaluation and system adjustments take place.

Annual reviews are compiled from quarterly or 6-month reviews to determine what changes should be made for the next cycle. In this stage, you improve upon existing policies, eliminate redundancies, and revise policies that need clarification.

In most cases, it’s better to have fewer policies to manage, so it’s not recommended to add new policies unless absolutely necessary. Creating a new policy for one-time use or unique events will only complicate the system in the future. Instead, focus on clarifying existing policies and removing those that are ineffective or redundant.

At the end of your streamlined expense reporting process, managers and auditors should be able to focus their time and resources on understanding the purpose behind major expense drivers. For example, managers may discover that a costly trip to a conference or tradeshow generated too few leads to justify the expense. Making informed decisions about whether to invest in that event again the following year can save the company significant time and money.

Each step of the expense reporting process requires careful attention to ensure that every policy contributes value. Policies must be thoughtfully designed and correctly implemented within the system.

On average, it should take about six months to fully stabilize a newly established automated expense reporting process. After those initial months of real-world use, it’s essential to revise, combine, and refine policies annually to ensure they continue to function effectively.

Working closely with customer support and your implementation team throughout this process is key to building and maintaining a strong expense reporting and auditing system. By trusting the expertise of professionals who have successfully implemented these systems before, you’ll achieve an improved expense reporting process that enhances control, boosts efficiency, and increases visibility.

Learn more about what an automated expense report auditing solution from DATABASICS can do for you.