Preventing Expense FraudBy
An incident involving an unethical bank analyst illustrates the need for finance leaders to use technology to enforce ethics.
A former Bank of America (BofA) research analyst allegedly “converted and misused” approximately $21,000 of the company’s funds by using his corporate credit card to pay for his personal expenses at an entertainment establishment in May 2019, only 20 days after he joined BofA Securities, according to an October 2020 Financial Industry Regulatory Authority Department of Enforcement complaint. The charges weren’t preauthorized or consistent with the expense policy of BofA; despite this, BofA paid them. After uncovering the alleged fraud, the bank fired the employee.
The BofA analyst is a case of a bad actor committing an ethical breach. But there’s an argument that the people who approved the claim also failed in their corporate duty, according to Anant Kale, CEO of AppZen, that could indicate a lackluster ethical culture or a failure to emphasize the organization’s code of conduct.
“Expense management and corporate culture go hand in hand,” Kale said. “The worry is that if the corporate culture allows or even expects this sort of behavior, then the expense management will have to fall in line and vice versa; if the expense management allows this sort of thing, then the corporate culture will adapt accordingly.”
The CFO takes the lead on all finance matters. The keys to the effectiveness of any policy or initiative are clarity, communication, and consistency, and that includes the organization’s code of ethics and accounts-payable procedures.
The COVID-19 pandemic demonstrated the need to move to remote working, and there were significant differences in the ways in which various organizations handled this change. Some finance departments proactively updated their policies to approve specific work-from-home expenses such as second computer monitors, internet access, and office supplies, resulting in workers who understood what they could expense and felt their employer was reacting in a fair and prompt manner, Kale said. In contrast, organizations that didn’t update their policies sowed confusion among employees about what they could and couldn’t expense.
The same principle applies to ethics and fraud prevention. Define comprehensive policies and communicate them to the workforce clearly.
“The finance team needs to follow through on its part of the bargain by identifying and dealing with claims that break policy,” Kale said. “Without this piece, the whole spend policy system becomes somewhat of a mockery, as appears to be the case with the BofA story.”
Ethics breakdowns often aren’t as obvious as the example of the BofA analyst. Sometimes incidents are much more complicated and can even fall into a moral or regulatory gray area. Finance professionals should refer to their organization’s code of ethics and the IMA Statement of Ethical Professional Practice.
“We all have a moral obligation to not abuse the organization we work for,” Kale said. “You could argue that as a CEO, I have the ability to expense anything I like and the company will pay for it, but personally, I have a moral obligation to both myself and the organization to not do that.”
The finance team typically creates policies and rules that define sensible parameters for out-of-pocket expenses. The expense type from the BofA case obviously wasn’t valid, but there are interesting ethical questions about what constitutes a valid expense.
“There will always be exceptions that fall outside of those policies, some of which will be valid and approved, some that will not, but as employees who claim expenses and finance team members that approve expense claims, we all need to apply our moral filters to the situation,” Kale said. “In the case of BofA, both the analyst and the expense-approval team failed to apply these moral filters.”
The combination of clear policies that are regularly updated to remain relevant, employee and employer moral filters, and rigorous processes to communicate and enforce these policies should remove many of the issues organizations face in this area.
“If you have a lax approach to defining and applying expense policies, it tells your staff that they can pretty much claim whatever they want on their expenses,” Kale said. “How can this not transfer through to corporate culture? We professionals have an obligation to create environments that function effectively and don’t encourage any of us to let our moral filters slip.”
Modern dashboard tools provide CFOs with on-demand access to information across the finance operation. Visibility via software allows the CFO to know where the business is, from cash flow and invoicing to spending and income. With this information, the CFO can monitor operations and share successes and failures.
“Without this level of on-demand information, it becomes virtually impossible for the CFO to control how the organization deploys its policies, ethically or otherwise,” Kale said. “The effective use of technology is the critical component here.”
Kale advocates for automating mundane tasks and making finance processes as touchless as possible. Take expense processing: AI tools enable finance teams to interrogate every line item on every expense claim. The finance team can then focus on ensuring that policies are clear, regularly updated, well communicated, and enforced as efficiently as possible.
“If 80% of expense claims are low-risk and can be processed automatically, then there’s zero value to having humans slow that process down,” Kale said. “That lets highly skilled human operators focus on the exceptions, claims that need more work.
“This is an efficient way of working and a much more rewarding working experience for the team, as opposed to trawling through line after line of valid expenses,” he said.
If an organization doesn’t allow trips with a particular ride-share company or only allows flights with carbon-neutral airlines, then these additional layers of intelligence can be built into the software.
“As organizations move toward more clearly defining their ethical and moral viewpoints, the ability to embed core values into every aspect of the business will become critical,” Kale said.
IMA ETHICS HELPLINE
For clarification of how the IMA Statement of Ethical Professional Practice applies to your ethical dilemma, contact the IMA Ethics Helpline.
In the U.S. or Canada, dial (800) 245-1383. In other countries, dial the AT&T USA Direct Access Number, then the above number.
The IMA Helpline is designed to provide clarification of provisions in the IMA Statement of Ethical Professional Practice, which contains suggestions on how to resolve ethical conflicts. The helpline cannot be considered a hotline to report specific suspected ethical violations.