Risk & Compliance Expenses Abuse: What Is The Cost Of A $4 Beer?

Expenses Abuse
Aug062018

Expenses Abuse Gets Media and Tax Payers In A Froth

Recent news articles out of Ohio ($4 beer dings Butler County Visitors Bureau in state audit) highlights the reputational risks that can impact an organization when it fails to monitor spending for non-compliance or expenses abuse.  The audit uncovered a single $4 Beer which was part of a payment for $11,554. While the applicable statues clearly prohibit this purchase from being reimbursed, it is important to put this in perspective. This was a single $4 purchase and it represents 0.035% of the total amount.

There are many ways this reimbursement request could have been identified. If the expense request had been stopped because a supervisor had noticed the purchase during the approval process, or an automated system had identified the non-compliant item then the requestor would simply have removed the item, and the remaining amount would have been reimbursed.  In this case, no audit finding would have been recorded, no blemish on the organization’s reputation would have occurred, and no news articles would have been written.

Expenses Abuse – Analytics Needed to Deal With Complexity in Large Organizations

However, for most jurisdictions, there are not enough resources available review all purchases, especially low dollar purchases. That is why automated analytics are needed. Unfortunately, most ERP, procurement and expense systems don’t contain all of the capabilities needed to identify improper payments. Whereas the technology to provide analytics to truly evaluate and interpret expenses is available to enhance an organization, lower cost and protect their reputation.

Analytics can also be tied to optical character recognition (OCR) that scans receipts, invoices and contracts. These analytics can score transactions for risk, fraud, or abuse, but they can also identify transactions that carry risk, or transactions, where the price paid, was too high. These analytics can supplement standard approvals, even scoring transactions prior to the approval to help streamline that process.  (I have discussed this in more detail in a previous post “Expenses Fraud or Honest Mistake? Predictive Analytics Will Tell” if you are interested in reading more.)

Without these analytics, jurisdictions leave themselves vulnerable to audit findings, damage to their reputation and surprises (and none of us like these types of surprises!).

As we think back to the original story and the initial question, it would be interesting to define the full “cost” of this $4 error.  In this case, it is quite significant, especially for a large organization when you look at the long-term impact.

Expenses Abuse – The Hidden Cost

  • Management overhead dealing with the press. The State’s audit is a public document, available on the Internet, and it was picked up by the press.  Of course, the article doesn’t highlight the relative magnitude of the issue or the fact that virtually all expenses were proper.  The organization’s management likely had to put together press releases, field questions from lawmakers, etc. over this one purchase.
  • Management overhead dealing with the state’s audit. The State’s audit showed minimal findings and only this single exception.  However, one can imagine the time spent supporting the audit and responding to the findings, including working with their employee to get reimbursed for the erroneous $4 change before the audit was published.
  • New agency policies and training. In order to be fiscally responsible, the jurisdiction likely wrote new policies to assure this type of erroneous expense did not occur again.  Policies were likely already in place that forbid this transaction, but new policies might have been created for additional manual reviews for these reimbursements.  These actions could have included new training and new formal guidelines.  The guidelines alone might have included numerous meetings and reviews by internal auditors, senior management and/or attorneys.
  • Ongoing new manual review procedures. In order to be fiscally responsible, the jurisdiction likely created new manual review procedures, potentially at multiple stages, to make sure this type of charge was not approved in the future.  One could imagine additional time required to process each expense claim, and potentially delays before reimbursement take place.  This represents an ongoing cost, until or unless these reviews are automated.
  • Loss of organizational reputation. While it is immeasurable, these audit findings and associated press articles hurt the reputation of the organization.  These articles fuel stereotypes some citizens may have about their Government, and potentially make them resentful of future payments which are required by the jurisdiction, potentially reducing voluntary compliance with taxes and other payments.  In the long term, this cost would be dramatically higher than the original $4.

As you can see the cost of this $4 Beer was likely significant, costing staff time and energy in the short term, resulting in additional efforts to process routine transactions indefinitely, and hurting the reputation of the organization, resulting in other potential losses (taxes, fees, donations, etc.)  This was a truly expensive $4 Beer.

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