Travel and entertainment (T&E) expense represents significant spend for most companies. Benchmarks estimate that total T&E expenses are as high as 12% of a company’s annual budget. Due to this large expenditure, T&E also carries a high risk of fraud and abuse. When you combine a high percentage of spend and a high risk for fraud and abuse, you have an area ripe for audit, which is why most audit departments will include a T&E review in their annual plan.
Many audit departments follow a standard audit program for T&E, often testing a sample of transactions for adherence to the T&E policy. Some audit departments will analyze all transactions for a sample of employees, such as top spenders, while others analyze all transactions for a sample of months from the year. The question is, with such a significant portion of your company’s resources going to T&E expense, is sampling the best approach? The answer is simple, no. When we rely on sampling, we can only identify exceptions in the transactions selected, and we risk missing material violations to the policy. As auditors, we should use data analytics to analyze 100% of transactions whenever possible.
When building an effective audit analytics program for T&E expense, there are two objectives to consider:
- Identify policy exceptions
- Gain an understanding of behavior/culture within the organization
All expense policies have their own nuances, but there are some simple tests that we should include in every T&E audit analytics program:
- Analysis of Top Spend by Employee - Consider if the total spend and transaction count is appropriate for their position.
- Analysis of Merchants/Merchant Codes - Summarize transactions by the merchant to gain an understanding of spend behavior and identify spend with merchants that look surprising (i.e. jewelry and department stores).
- Analysis of out of pocket expenses – Out of pocket expenses for things like cash tips or parking may not require receipts due to the dollar threshold outlined in the policy. Look for instances where employees have more claims than average.
- Weekend and Holiday testing - While some weekend transactions are expected, most transactions are likely to occur on business days. Like weekends, holidays transactions should not be frequent.
- Duplicates Transaction Testing - Identify repeat claims using amounts and dates where the payment type is different. For example, one claim submitted on the corporate card and the other claim submitted as out of pocket.
- Key Word Analysis - Description fields can reveal unauthorized transactions. Look for keywords that could indicate fraudulent transactions (Examples: “Gift card”, “Quota”, etc.)
- Split transactions/circumvention of limit controls – If your company policy contains thresholds where receipts or special approvals are required, employees may split a transaction into two or more to bypass the control. Testing for split transactions is an extension of duplicate testing. To identify potential splits, look for transactions where merchant, claimant, and date are the same.
Incorporating audit analytics into your T&E audit program will allow you to provide more coverage and assurances around the transactions. Start with these tests, then develop some of your own. Once you have incorporated audit analytics into your annual T&E review, you may even consider developing a program for continuous monitoring of T&E expenses.