Most employers leave it to their accounts department to determine what does and does not constitute a business expense, but it is line managers who often "sign off" on expenditure, says iHR DirEx director Geoff Churcher.
If a line manager's position gives them a delegated authority to approve an expense, the accounts department will usually accept it at face value, Churcher says.
The problem is, when it comes to "grey areas" such as work-related entertainment and gifts, many managers lack the tools to correctly determine what is and is not a legitimate business expense.
"A lot of companies, I'd think probably the majority, have very general, very loose expense policies," says Churcher. "It leaves them open to the situation where people will interpret things in a way that's different to what was intended by the person who put the policy out."
Without a clear policy, managers tend to rely on their own experience and each other's interpretations. This can give rise to a "custom" where one manager will say "I put that on my expenses and nobody quibbled with it," causing another to think, "oh well, I can put that bottle of Grange on expenses too", he explains.
Particularly when an expense is paid for on a company, rather than personal, credit card, "it's assumed the person has in actual fact incurred it as a business expense". Because the employee does not need to provide the same level of explanation as they do when seeking reimbursement, the system is even more vulnerable - and requires even more specific policies, he says.
In cases where managers habitually give the accounts department a receipt and simply say "I had lunch with a client", it is particularly difficult to ensure the expense was legitimate, Churcher says.
Not only are meals with unidentified "clients" problematic from an accounting perspective, they pave the way for people to claim dinner with a brother-in-law or girlfriend without being noticed, he says. "They're the things that become quite difficult for a company to police and monitor."
In most cases, with time, "somebody will brag about something, or somebody will get an inkling a person's not behaving in an ethical way and you'll get a complaint". But without a clear, prescriptive policy, an employee can contend they genuinely believed their actions were acceptable. Employees who are caught often receive little more than a warning, which leaves the employer to bear the cost, Churcher says.
While the accounts department has an "overarching requirement" to "keep on top of all accounts to make sure they're legitimate business expenses," the real issue is to train managers to negotiate the "grey areas", he says.
By taking time to clearly define what is and is not acceptable, and develop relevant examples, employers can quickly teach staff what is company practice, he says.
By monitoring expenditure, particularly where entertainment and gifts are involved, they can police the system too.
Churcher suggests looking for inconsistencies in spending by comparing people with similar roles. "If you've got 50 sales reps and one of them is spending a thousand dollars a month on entertainment - unless that same person is right up the top of the performers" - it warrants investigation, he says.
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